Market Review: March 16, 2018

Scott GreenDaily Market Report

Closing Recap
Friday, March 16, 18
Equity Market Recap
·      Stocks end mostly higher on Friday, boosted by strong sentiment data (UoM data best reading in 14-years) and as Industrial Production easily topped consensus, though Housing Starts for February came in below expectations. The data comes ahead of next week’s FOMC interest rate policy meeting, where a rate hike is widely expected, but markets look for clues regarding the pace of future hikes. Technology shares lagged the S&P 500 while energy stocks led on oils advance. Today is the quarterly quadruple-witching session expiry session, adding some volatility late session (simultaneous expiration of stock-index futures, stock-index options, single-stock futures and stock options). Despite today’s advance, major U.S. averages posted losses for the week amid political turmoil in the U.S. and trade war fear concerns. The S&P 500 index snapped its 4-day losing streak, while the Nasdaq Composite snapped its 3-day losing stretch.
·      There was more turmoil in the Trump administration this week, with media reports saying last night the president was planning to fire his national security adviser H.R. McMaster, which would be the second high-profile firing from the White House this week. Secretary of State Rex Tillerson was fired on Tuesday and replaced with CIA Director Mike Pompeo. However, according to White House Press Secretary Sarah Huckabee Sanders, “Just spoke to @POTUS and Gen. H.R. McMaster – contrary to reports they have a good working relationship and there are no changes at the NSC,” she said in a Twitter post. The moves followed Economic Advisor Gary Cohn resignation last week after disagreeing with Trump’ tariff proposal, and being replaced with Larry Kudlow.
·      Concerns over a possible trade war between the U.S. and key trading partners remain on investors’ minds, with this weeks’ focus on China after the White House said Wednesday it will seek to trim the U.S.’s trade deficit with China by $100 billion, using tariffs. The European Union, meanwhile, was working to get the bloc exempt from the tariffs. The headlines come after some fears were alleviated last week after “carve-outs” to exclude Canada and Mexico for tariffs.

Economic Data
·      Housing Starts for February fell (-7.0%) to 1,236K annualized rate, more than the expected decline of (-2.7%) to 1,290K after rising 10.1% the prior month; single family starts rose to 902K while multifamily starts fell to 334K in Feb. Building permits fell(-5.7%) to 1,298K vs. 1,377K in Jan and was below the 1,320K estimate
·      University of Michigan Preliminary Sentiment rose to 102.0 (a 14-year highs) and topping the 99.3 estimate and above 99.7 prior month; the current economic conditions index rose to 122.8 vs. 114.9 last month and the expectations index fell to 88.6 vs. 90.0 last month.
·      Industrial production for February rose 1.1% MoM after falling (-0.3%) in January and topped the +0.4% estimate. Capacity utilization rose to 78.1% from 77.4% in January revised down from 77.5% and compared to estimate of 77.7%
·      U.S. job openings (JOLTs data) rose to 6.312M in January from 5.667M prior month and above the 5.917M estimate. Jan. job opening rate (job openings as a % of total employment plus openings) 4.1% vs 3.7% prior month. January pace of hiring3.8% vs 3.7% prior month
·      Crude oil prices end higher, getting a midday lift on no apparent news (there were some headlines about Israel and Palestine regarding a military attack, which could have been the catalyst), with WTI crude settling higher $1.15 or 1.9% to settle at $62.34 per barrel. The weekly rig report showed another gain in total rigs, as the total U.S. rig count rose 6 rigs to 990, with oil rigs up 4 to 800, and gas rigs up 1 to 189. Still, for the week, WTI crude was down roughly 0.5%, though posted its best closing level in over a week. 
·      Gold prices decline, falling -$5.50, or 0.4% to settle at $1,312.30 an ounce and ended at its lowest level since the 1st of March as the dollar extends its weekly gain; gold futures ended the week lower by just under 1% failing to gain support despite persistent global political and trade tensions. All about the FOMC meeting next week for the dollar and bonds.
Currencies & Bonds
·      The U.S. dollar advanced following another round of positive economic data, with the euro dropping below the 1.23 level, its lowest level in a week, though the dollar slipped against the Japanese yen, falling below the 106 level (before rebounding). This week appeared to be positioning ahead of next week’s FOMC meeting where a rate hike is expected. Bitcoin rebounds, rising over 3% but still down roughly 5% for the week. The USD resumes strength against the Canadian dollar, up over 2% this week above 1.305
·      Treasury prices fell as yields rebound from earlier losses this week, with the benchmark 10-year yield topping highs above 2.85%, ending up 2 bps following strong economic data, including a 14-year high for the UoM sentiment reading. The data this week has been healthy, keeping expectations high for more aggressive rate hikes by the Fed ahead of its key monetary-policy update on Wednesday. Treasury’s have struggled for direction throughout the week as data remains strong, but inflation expectations (for the most part) have eased somewhat.
Sector News Breakdown
·      Retailers; ULTA among top outperformers in the S&P 500 index despite mixed results and lower guidance; strong comps for Q4 of 8.8%, but guides next Q EPS lower; TIFreported Q4 comparable sales that trailed analysts estimates (rose 1% vs. est. 3%), amid decelerating trends in January, with lower EPS guidance; BKE rises as holiday-quarter EPS, sales beat analysts’ estimates (beat every quarter this year after missing in every quarter the year before; HIBB Q4 EPS/sales/comps all topped consensus but guided year $1.65-$1.95 vs. est. $2.08; ZUMZ mixed results, though sales for this and next quarter top estimates; PERY and KIRK also movers on earnings
·      Housing & Building Products; in flooring, LL was upgraded to buy at Loop Capital on improved confidence in management’s margin outlook after mgmt meetings; homebuilders were in focus following a weaker monthly housing starts and building permits data report; KBH reports earnings next week in the builder space; HDoutperformed in the Dow
·      Casino, Lodging & Leisure; in RV space, THO was upgraded to buy at Argus saying pullback provides favorable entry point as Thor remains a leader in the RV industry;WGO was upgraded to buy at SunTrust and $54 tgt as believe the recent sell-off provides a more attractive entry point and that, at current levels, the motorized business has essentially been de-risked
·      Consumer staples; KR approves $1B stock authorization; SFS was downgraded to Equal-weight at Barclays with PT $6 to reflect Smart & Final’s fiscal 2018 guidance; Japan Tobacco Inc. agreed to buy Russia’s largest cigarette maker Donskoy Tabak for 90 billion rubles ($1.6 billion)
·      MLPs partially recover after FREC ruling weighed on several names yesterday: Several MLPs respond to impact from FERC ruling: The Federal Energy Regulatory Commission’s order from Mar 15 disallows pipelines in Master Limited Partnership (MLP) structures to recover income tax at FERC rates, arguing that doing such allows double income tax recovery. TEP announced that it does not expect policy revisions governing recovery of income taxes released from the Federal Energy Regulatory Commission to have a material impact on the company’s revenues; MPLX said it sees ruling having de minimis effect on earnings
·      Utilities, Alternative Energy and Power; NEP upgraded to buy from underperform at Bank America calling it the most credible drop-down story in MLP’s due to its unmatched growth potential, financial flexibility; Dominion (D) was downgraded at both UBS and JPM as a result of the implications of FERC’s revised policy statement regarding tax treatment for MLPs, as well as a separate Notice of Proposed Rulemaking issued to all FERC-regulated natural gas pipelines – actions create a material risk overhang to the core valuation thesis for asset dropdowns; DM was downgraded at Wolfe research to underperform on ruling as well
·      Other movers: Weekly rig count data: Baker Hughes (BHGE) weekly rig count showed the total U.S. rig count rose 6 rigs to 990, with oil rigs up 4 to 800, and gas rigs up 1 to 189 and miscellaneous rigs up 1 to 1; EXXI shares dropped on earnings results as posted loss of $6.47 a share that included a non-cash ceiling test impairment charge of $145.1M
·      Banks; WFC shares dropped late morning after the WSJ reported The Justice Department has extended its investigation into sales practices at Wells Fargo into the bank’s wealth-management business; Broker-dealers and insurers rallied after a U.S. appeals court struck down a sweeping Obama-era rule that aimed to protect millions of Americans from conflicted investment advice; REITs have held up well this week amid lower Treasury yields; today in research, QTS was upgraded to buy at Goldman Sachs and raise tgt to $45 as believe has the tools and assets needed to meet its financial targets, and our new sensitivity analysis across a number of operational swing factors suggests potential for upside even in a bear case
·      Pharma & Biotech movers; ZSAN shares advanced as reaches enrollment milestone in M207-ADAM long-term safety study; VNDA 5.5M share Secondary priced at $17.00;INFI shares slumped after earnings results; specialty and generic pharma names outperformed, with notable gains in ENDP, MNK and TEVA
·      Medical devices and equipment; NVTR upgraded to overweight at Piper the strong 4Q results, entering ’18 with strong momentum in the SCS marketplace with Algovita, and pending MRI indications; RMTI shares slipped early on a wider than expected Q4 EPS loss
·      Healthcare facilities and services; Evercore/ISI cut prices targets on CI to $180 vs $225 (says CI without deal valued at $205) and ESRX cut to $78 vs $83 (ESRX without deal $76) saying widening deal spread indicates the deal closing is “less than 100% certain.” LPNT was upgraded at Wolfe; WCG was upgraded to buy at Bank America
Industrials & Materials
·      Metals & Mining; steel sector mentioned at KeyBanc saying hot rolled coil steel price current levels are unlikely to continue in 2H18, as recent survey showed aggressive 1H hedge buying by customers, likelihood of 2H18 import supply recovery and U.S. Steel’s Granite City restart – the analyst favors more defensive/free-cash-flow rich stocks that are building long-term earnings power, such as RS, STLD and TMST on later cycle EPS power; STLD issued lower guidance (Q1 EPS 88c-92 vs. est. 95c); gold miners (ABX, NEM, GG) outperformed despite lower gold prices
·      Chemicals; AMRS shares jumped after saying it expects more than $10M of positive Ebitda for 2018 (Bloomberg est negative Ebitda); IFF, AVY, RPM, VVV all downgraded to underweight at JP Morgan as shares trade at the high end of a valuation range for its peers in the Specialty Chemicals area
·      Aerospace & Defense; BA rebounded off early underperformance, but still down roughly 7% for the week; TDG announced the acquisition of Esterline Technologies’ Kirkhill operations for $50M – Canaccord notes it is consistent with TDG’s management desire to limit its defense exposure, with its focus on commercial markets; Space Exploration Technologies Corp., the formal name of Musk’s company, won a $290 million fixed-price contract to launch three Global Positioning System Satellites into orbit on Falcon 9 rockets by the end of 2020
Technology, Media & Telecom
·      Semiconductors; QCOM was active after the Financial Times reported that Dr. Paul Jacobs (former chairman and CEO of QCOM) was exploring options to take the company private and was in discussions with investors including Softbank tgt raised to $100 by a second analyst (Baird after Nomura did last week) as sees Q1 PC DRAM contract pricing up 8 percent to 10 percent compared to the prior quarter; AVGO earnings grew 40% y/y and came in slightly ahead of expectations, with GM upside in the quarter and outlook (reports follows blocked attempt by Trump administration to buy QCOM this week)
·      Software movers; ADBE reported 1Q results that came in ahead of consensus across all key metrics (analysts raise price target); in video games, Feb. NPD video game software sales (EA, TTWO, ATVI) were up 5% y/y, driven by strong incremental titles and an ongoing rebound for Call of Duty; in security, ZS 12M share IPO priced at $16 per share, above the $13-$15 range; SYNC 2018 guidance came in lower, and management withdrew its long-term guidance through 2019
·      Hardware and components; JBL reported upside to Q2, provided Q3 estimates ahead of street expectations and remained on track to achieve $3.00+ EPS by FY19; WDCupped to outperform at Baird and raised tgt to $135 from $93 based on stronger than expected memory trends; KODK forecasted 2018 revenue of $1.5B-$1.6B vs. $1.5B in 2017
·      Internet movers; OSTK shares declined after saying in a filing  that a previously known U.S. SEC investigation could delay a planned initial coin offering and hurt business; Wayfair (W) shares weak after OSTK CEO specifically called out the company in declaring a shift to a “classic internet ‘growth strategy’” at its e-commerce business

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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