Friday, April 13, 18
Equity Market Recap
· Stocks extended losses late afternoon, falling near to the lowest levels of the day in the final hour of trading, heading into the weekend amid fears the U.S. and others could retaliate against Syria following its chemicals weapon attack on civilians last weekend (reports late day said the U.S. had “very high level of confidence” Syrian gov’t was behind attack). In addition to the global tensions, there were several headlines out regarding President Trump’s personal attorney Michael Cohen, Deputy AG Rod Rosenstein and Special agent Mueller’s investigations that caused uncertainty as to what can happen over the next few days. Prior to the drama late day, stocks had been weaker amid a decline in banks after mixed quarterly results and some cautious about the environment spooked some investors. JPM CEO Dimon, after beating earnings on slightly lower revs, the environment is intensely competitive and lending was flat for the quarter, while WFC warned its Q1 results said the environment is intensely competitive and lending was flat for the quarter. Despite today’s market declines, stocks still ended the week posting gains heading into the start of earnings season next week, with results Monday from BAC, SCHW, JBHT and NFLX.
· Oil prices close higher, capping off a week of solid gains, with WTI crude rising 32c, or 0.48% to settle at $67.39 per barrel, its best closing total since November 2014. For the week, WTI crude managed a gain of about 8.6% (best weekly performance since July). Oil prices managed to eke out another gain despite bearish inventory data mid-week and reports from Baker Hughes today that more oil rigs were added in the latest week. Oil prices got a lift on the week amid fears of a military conflict in Syria and after a report from the IEA today indicating that OPEC soon will have succeeded in reaching its target for reducing the global supply glut. For the week, in the international benchmark Brent was up roughly 8%. Natural gas rose about 5c to $2.735 mln btu’s, the highest levels in over a month on forecasts of cooling weather.
· Gold rebounds after yesterday’s decline, with June gold climbing $6, or 0.5%, to settle at $1,347.90 an ounce, posting a weekly gain of just under 1%. Gold prices fell from 10-week highs reached Wednesday, volatile the last few weeks on rising interest rate hike expectations, but recently getting a lift as a defensive play following the escalating global tensions with Russia/Syria and China. U.S. President Donald Trump and his national security aides on Thursday discussed options on Syria, where he has threatened missile strikes in response to a suspected poison gas attack. Aluminum prices touched a six-year high earlier and posted its biggest weekly gain ever of over 12% after the United States imposed sanctions on Russia’s UC Rusal, the world’s second-biggest producer, raising concerns the removal of supply would further tighten supply.
· The U.S. dollar was mixed vs. most counterpart currencies, while the overall dollar index (DXY) is flat on the day around 89.75, but down roughly -0.4% for the week. The dollar climbed to its best level against the Japanese yen since late February (highs of 107.78), while the euro was little changed most of the day after falling yesterday after unexpectedly dovish ECB minutes. The USD at highs vs. Canadian dollar today, up 0.2%, but for the week, slid over 1.3% as oil prices jumped (the Loonie at 7-week highs coming into today). In crypto-currencies, Bitcoin posted its best week in over four-months, rising over 4% today and 22% for the week to reclaim the $8,000 level, while Ethereum, Ripple and Litecoin also advance.
· Treasury markets erased earlier declines, as the yield on the 10-year slipped slightly from yesterday’s close to around 2.82%, but was higher on the week. The 2-year yield at highest levels in over 10-years, topping 2.36% on hawkish Fed comments this week. Bonds have pulled back this week amid easing tensions overseas with Russia/Syria and China related to tariffs. The “hawkish” statement from the Fed Minutes on Wednesday (related to March meeting), leading to expectations of more aggressive rate hikes by the Fed.
· Preliminary April Michigan Sentiment fell to 97.8 from 101.4 and came in below the 100.4 estimate; the current economic conditions index fell to 115.0 vs. 121.2 last month, while the expectations index fell to 86.8 vs. 88.8 last month; expected change in median prices during the next year fell to 2.7% vs. 2.8% last month
· U.S. Job Openings (JOLTs) fell to 6.052M in February from 6.228M last month, though was above the est. 6.024M; said February pace of hiring 3.7% vs 3.8% prior month; layoffs and discharges at 1.1% in 2018 vs 1.2% in January
Sector News Breakdown
· Consumer Staples; Wells Fargo lowered Q1 EPS estimates for MUSA & CASY and see a negative risk/reward for MUSA since we think there’s a risk it misses expectations and guides lower as anticipate declining RIN credit prices and modest fuel margins (Jefferies downgraded shares of MUSA); in food retail, Height Securities said WMT, TGT, SVU, KR won’t be happy with the farm bill introduced on April 12 by the House of Representatives as draft includes new work requirements for food stamp recipients; NUS was downgraded to hold at Deutsche Bank
· Restaurants; SBUX was downgraded to market perform at Cowen; BJRI positive mention at Wedbush, raising tgt to $52 saying believe upside to our and consensus estimates remains
· Housing & Building Products; ZG announced plans to participate in home buying & selling directly on its marketplace using its own capital/also pre-announced 1Q revenue & EBITDA, 2% and 1% above consensus respectively but brought down its FY18 EBITDA guidance by 11%
· Casino, Lodging & Leisure; SEAS disclosed it expects a civil action from the SEC after saying in a SEC filing late Thursday, it received a Wells notice from the SEC on April 6; in cruise lines, which have been volatile this week, Wedbush said NCLH remains on the Wedbush Best Ideas List, as it has the least amount of exposure to the Caribbean market; casino stocks declined, paring recent gains (WYNN, MGM, LVS)
· Auto’s; TSLA active after CEO Elon Musk tweeted earlier today that the electric vehicle maker will be profitable & cash flow positive in 3Q & 4Q; GPC upgraded to Neutral at Bank America following the announcement of the spinout of GPC’s office products biz; TEN was downgraded to neutral at Goldman Sachs
· Weekly oil prices jump, as the energy sector outperformed this week. Today, the IEA said it continued to expect global oil demand to grow by 1.5 million barrels a day in 2018 but cautioned that potential U.S. and Chinese trade tariffs posed a “downward risk” to the forecast. Also, Baker Hughes (BHGE) weekly rig count showed that total rigs rose 5 to 1,008, while oil rigs up 7 to 815, gas rigs down -2 to 192 and miscellaneous rigs unchanged at 1 (rigs continue to rise)
· Oil drillers; Credit Suisse upgraded ESV to outperform and downgraded DO to underperform and update estimates for group saying utilization for both jackups and floaters are still in the ~60% range and while that should move higher in 2018 pricing is still not yet even in the conversation; firm also said view management commentary around activity, cost/capex guidance, and M&A will be the key drivers of stock performance in the upcoming Q1 earnings season/top pick RIG
· Refiners; Morgan Stanley upgraded HFC to Equal-weight on higher earnings outlook and moderated valuation; for the sector, says expect soft cracks and heavy TARs, particularly in PADD 5, to weigh on results. A constructive summer driving season is formulating, while attractive Midcon differentials offer a sweetener to margins
· Utilities outperformed; overnight, the New Jersey legislature passed the nuclear zero emission credit (ZEC) legislation which UBS said expect consensus EPS estimates to rise which should help PEG stock in the short-term. The bills require power companies in New Jersey to generate 50% of their electricity from renewable sources by 2030 and subsidize existing nuclear power plants – note strength in the space today with EXC and PEG among those rising)
· Large Cap banks in focus as earnings begin: sector opened higher after mostly better earnings results, but turned negative, taking down the overall market (note banks have rallied in recent days on rising rate expectations from the Fed and general market strength – so could be a little profit taking): 1) JPM mixed results on EPS beat though revenues lag on weak investment banking/Jamie Dimon said the environment is intensely competitive and lending was flat for the quarter; 2) Citigroup (C)posted top and bottom line quarterly beat saying Q1 results demonstrate strength and balance across franchise; 3) WFC calls its 1Q “prelim results,” subject to change due to talks with CFPB, OCC to resolve matters regarding its compliance risk management program and past practices involving automobile collateral protection insurance policies and mortgage interest-rate lock extensions; 4) PNC Q1 EPS was in-line with NIM of 2.91% slightly below views and said total revenue declined 3% Y/Y to $4.1B, reflecting 9% decrease in non-interest income to $1.8B and net interest income increased 1% to $2.4B; said FY18 guidance was unchanged; 5) FHN Q1 EPS topped views while FRC net interest margins topped consensus
· REITs; Baird incrementally bullish on storage stocks heading into 1Q earnings; Raising sector weighting to Market Weight as 1Q private operator/developer channel checks indicated stronger 1Q demand (move-ins/pricing power) vs. expectations in most markets (CUBE, EXR, LSI, NSA, PSA). SunTrust said LSI has a good chance of meeting or exceeding the high end of its same-store revenue guidance given its pricing momentum, and it could raise guidance later in the year
· Large Cap Pharma; LLY was upgraded to outperform at BMO Capital saying concerns about Humalog and Verzenio’s outlook as well as baricitinib uncertainty are mostly reflected in the stock; Reuters reported MYL is in advanced discussions with Merck KGaA to purchase its consumer health unit for $4.3B-$4.9B https://reut.rs/2HyKff0 ; MNOV presented results from its Phase 2 trial of MN-001 at the International Liver Congress
· Biotech movers; ICPT announced clinical data from a liver biopsy-based sub-study from the POISE Phase 3 trial suggesting that long-term OCA treatment in patients with PBC was associated with reversal or stabilization of fibrosis and cirrhosis; GLPG announces the design of its registrational Phase 3 program for GLPG1690 in ideopathic pulmonary fibrosis; ECYT was initiated with a buy and $17 tgt at Jefferies lifting shares early
· Healthcare suppliers, services and equipment; GKOS downgraded to hold at Stifel after survey leads to believe Glaukos’ share losses will continue into 2019; PLSE rises after announcing clinical efficacy results of its first multi-center study of Nano-Pulse Stimulation technology for the treatment of seborrheic keratosis lesions; regarding the CRO sector, Goldman Sachs said adding more CRO exposure despite Biopharma M&A jitters as upgraded IQV to buy
Industrials & Materials
· AG & Machinery; CAT tgt raised to $168 at RW Baird and adding positive Fresh Pick designation into earnings and through April; shares of BA, Rolls Royce, others declined early amid escalating troubles with Rolls-Royce engines that power a quarter of BA’s 787 jet fleet and news that Russia may stop supplying titanium needed for production of Boeing planes.
· Transports; sector outperforms broader major averages still down on the day; airlines led the gains, with ALK up the most following strong March monthly metrics as traffic up 6.5%; shares of DAL (better earnings yesterday) and UAL higher while truckers lagged
· Chemicals; in lithium space, ALB was upgraded to buy at Citigroup with $106 tgt saying they do not see a collapse in Li carbonate/hydroxide contract prices as predicted by the bears; shares of FMC also leveraged to lithium market
Technology, Media & Telecom
· Internet; AMZN and STMP shares active as the Trump administration has issued an executive order to look into the U.S. Post Office Service financials; DBX initiated reduce and $21 target at Nomura citing consistently low penetration rates; NFLX upgraded to buy at Deutsche Bank and raise tgt (4th analyst price tgt hike this week ahead of earnings Monday)
· Semiconductors; QCOM active following a CNBC report that former chairman and CEO Paul Jacobs is leading a fund-raising effort to buy take it private https://on.mktw.net/2JHWPsW; AVGO announced a new $12B share repurchase authorization; SIMO positive mention at Craig Hallum saying as NAND prices continue to fall, setting SIMO up for a better 2018 than current expectations; LEDS shares declined after posting lower revenue
· Software movers; EA announced organizational changes announced as CFO Blake Jorgensen will now also serve as COO, Matt Bilbey will become the EVP of strategic growth, and Laura Miele will become chief studios officer (all have been EA employees for some time/promoted)
· Hardware & Comm Equipment; FFIV upgraded to outperform at William Blair after channel checks pointed to a positive inflection in the company’s business trends; ANET downgraded to neutral at Cleveland Research; INFY active on Q4 beat with net profit decline and acquisition announcement; SANM was upgraded to buy at Citigroup
· Media & Telecom; CMCSA to offer new and innovative Xfinity packages including NFLX subscription; ZAYO upgraded to outperform at Raymond James as believes the sales force transition is seeing early signs of positive results
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.