Market Review: April 18, 2018

Scott GreenDaily Market Report

Closing Recap

Wednesday, April 18, 18

Equity Market Recap

· U.S. stocks finished the day where it started, little changed and moving in a very narrow trading range as markets took a rest following a strong 2-day rally that took major averages (S&P 500, Dow Industrials, and the Nasdaq Composite) above key technical trading levels (all top their respective 50-day moving averages the last 2-days). Stocks got a lift overnight amid easing geopolitical tensions after reports that CIA director Mike Pompeo met with Kim Jong Un last week in advance of a possible summit, and that meetings went well. That, coupled with reports of no new sanctions on Russia and all quiet for a third day on the China/US trade dispute, turned the attention again to corporate earnings, which came in mostly better (ahead of another busy few days ahead – AXP, AA among those tonight). Dow component IBM posted weak results which dragged technology lower while Morgan Stanley shares failed to sustain gains after the company reported record profits (many banks have declined post earnings thus far). Treasury 10-year yields traded above 2.86%, while the shorter-term 2-year rises above 2.42%, while the dollar gained. Oil climbs to a nearly 3 1/2 year high after a surprise weekly fall in U.S. crude stocks. Transports got a big lift, led by better earnings from CSX in rail space and UAL in the airline sector. The Fed Beige book noted improvement in regions but said outlook positive though businesses voiced tariff concerns/also said expected more price rises in steel and building materials (raising inflation fears).

Fed Beige Book

· In the latest Beige Book report, the Fed said that economic activity continued to expand at a modest to moderate pace across the 12 Federal Reserve Districts in March and early April. Outlooks remained positive, but contacts in various sectors including manufacturing, agriculture, and transportation expressed concern about the newly imposed and/or proposed tariffs. Consumer spending rose in most regions, with gains noted for non-auto retail sales and tourism, but mixed results for vehicle sales. Manufacturing activity grew moderately, and demand for nonfinancial services was mostly solid. Residential construction and real estate activity expanded further, although low home inventories continued to constrain sales in several Districts. Loan demand increased, and commercial real estate activity and construction improved.


· Oil prices rise as WTI crude settles at the best levels of the day, soaring $1.95 to close at $68.47 per barrel, back near 3 1/2 year highs after bullish inventory data earlier. Oil prices jumped late morning after the EIA reported an across-the-board bullish report on U.S. oil inventories, showing bigger-than-expected declines in stockpiles of everything from crude oil to gasoline Exports of crude oil were also strong at 1.7M bpd (helped amid the OPEC/Russia production cuts and problems in Venezuela), while US oil output hit another record high of 10.5M bpd. Russian Energy Minister Alexander Novak said that he would meet his Saudi Arabian counterpart Khalid al-Falih on April 20. The Joint OPEC-Non-OPEC Ministerial Monitoring Committee (JMMC), tasked with monitoring the way the global pact on oil production cuts is being implemented, will be held later this week in Saudi Arabia.

· Gold futures rise $4.00, or 0.3% to settle at $1,353.40 an ounce, its highest finish since April 11, trading in a tight range most of the day ahead of the Fed Beige Book release (which was at 2:00 PM EST). Stocks were little changed most of the session, keeping gold prices tight, having remained range bound between $1,310 and $1,360 this year as the dollar has weakened, but interest rate hike expectations have increased. Silver prices touched best levels since February. In other metals, nickel prices soared to a three year peak amid concerns that the metal would become ensnared in U.S. sanctions on Russian companies caused it to break through key technical levels. Aluminum prices rose after hitting its highest in nearly seven years at $2,537.50.


· The U.S. dollar ended slightly higher as the dollar index (DXY) rises just above the 89.50 level (overnight highs 89.77). The Canadian dollar falls after the Bank of Canada left rates unchanged and PM Poloz reiterates caution on rate rises (dollar rises 0.7%). The euro trades back up near the 1.24 level (highs 1.2397) vs. the greenback, but ended up only slightly; the dollar gains against the Japanese yen. The British Pound fell roughly -0.5% after rising recently.

Bond Market

· Treasury markets slipped as yields spiked, especially on the short-end of the curve, as the 2-yr topped 2.42%, (up over 3bps) rising a 4th straight session and further narrowed the gap between shorter-dated debt and longer-dated government paper. The 10-yr was up around 4 bps above 2.87% and the 30-yr little up slightly at 3.03%. The spread between the two-year note yield and the 10-year note yield, narrowed to 42.4 basis points, it’s tightest since September 2007.

Sector News Breakdown


· Retailers; AMZN and BBY announced a collaboration to bring the next generation of Fire TV Edition smart TVs to customers (shares weighed heavily on shares of ROKU); SMG announced it signed a definitive agreement to acquire the largest US hydroponics distributor, Sunlight Supply for $425M in cash; NKE VP Global Brand Digital-Marketing Innovation leaves, WSJ reported; DLTR upgraded to buy at Loop Capital; ETH guided Q3 EPS 10-c11c, below the 16c estimate (furniture retailers); FRED shares fell after pushing back 4Q results, a delay related to the decision to sell its specialty pharmacy business

· Consumer Staples; in tobacco, MO downgraded to neutral at Citigroup saying that JUUL is beginning to disrupt the U.S. cigarette industry/notes U.S. cigarette volumes fell 6% in 1Q, likely due to “rapid” growth of JUUL (a non-refillable vaporizer) – PM reports tomorrow morning; HLF said it commenced a self-tender offer to buy back up to $600 million

· Restaurants; SunTrust said restaurant stocks have outperformed YTD (+7.6% vs. +1.2% for the S&P) and they see further upside as demand continues to improve, following a slow start to the year (view WEN and JACK as best positioned); CMG tgt raised to $380 at SunTrust; Raymond James said remain selectively constructive towards our restaurant universe as industry sales have stabilized over the past six months; Stifel raised tgts on DPZ, TXRH, WING, YUM, WEN, RRGB, CHUY, MCD saying recent industry data suggests sales improved late in the quarter

· Casino, Lodging & Leisure; NCLH upgraded to buy at Deutsche Bank; NCLH also announced a $1B stock repurchase plan; in RVs, SunTrust lowered FY18/FY19 estimates for Buy-rated THO/WGO to reflect softer March/April retail conditions; ELY downgraded to neutral at Davidson

· Autos; TSLA rebounds after two days of losses/KeyBanc said incremental conversations with 21 sales centers showed further Model 3 volume improvements, and little to no erosion in the brand/Morgan Stanley’s said that “Tesla may not ‘need’ to raise funds


· Energy stocks jumped as WTI crude traded to fresh 3 ½ year highs as a drop in U.S. inventories reported by the EIA came in at a surprise weekly decline of over 1M barrels vs. an estimated build of 650K barrels. U.S. crude and gasoline inventories fell last week, the API also said overnight. In stock news, REIreported 1Q 2018 production of 5,633 BOE per day which is 7% under the consensus of 6,080 BOE per day; there are 32 S&P components trading to 52-week highs today – with many in the energy sector: APC, HES, PSX, VLO, MPC, COP, PXD

· Utility, Solar, Alternative power; FSLR trades to near 7-year high after being upgraded to buy at Bank America on increasingly positive data points; SPWRagreed to buy SolarWorld AG’s U.S. unit, a rival that was instrumental in the effort to impose U.S. tariffs on solar imports, Bloomberg noted; Utilities opened higher, but slipped midday


· Bank earning; MS rises on results as posted a surprise jump in fixed-income trading, which combined with better-than-expected equities results helped push revenue above $11 billion for the first time ever; USB profit grew 13%, with loans surging and taxes falling as EPS and NIM beat, but revs miss; FULTposted better than expected margin results but expenses missed estimates; LTXB shares fall amid disappointing earnings report with significantly higher provision expense related to an energy credit resolution and healthcare finance reserve allocation – downgraded at Raymond James as results fell notably short of RJ/consensus stemming from credit-related issues; other bank earnings from HBHC and HOPE and tonight names expected to report include: AXP, BPFH, BXS, CATY, CVBF, EGBN, FBNK, GSBC, RLI, TBK, TCBI, TMK, TSC, UMPQ; MTB upgraded to neutral at Baird on weakness saying though bank earnings have started with some profit taking, we remain opportunistic with bank exposure

· Financial services/blockchain; RIOT shares under pressure after saying it received a subpoena from the SEC on April 9 requesting “certain information;” mortgage insurers slumped after MTG Q1 results failed to ease investor concern after the company recently cut borrower-paid premiums last week which hurt shares of ESNT and RDN as well


· Large Cap Pharma; group quiet after weakness yesterday post JNJ mixed results, BMY fails to rally after falling over 10% last 2-session after better MRKtrial data; CALA announced FDA fast track designation for CB-839 in combination cabozantinib; TLGT received approval from the FDA of its abbreviated new drug application, or ANDA, for Clobetasol Propionate Cream

· Biotech movers; RARE upgraded to buy at SunTrust following FDA approval of phosphorous genetic disease drug on better than expected pricing from $118k to $160k for kids & $200k for adults; INSY announced plans to advance clinical research of dronabinol inhalation using a novel and patented breath-actuated device; BLCM 8M share Secondary priced at $7.50

· Medical devices, services and equipment; ISRG reported an impressive quarter, beating consensus estimates on revenue, system placements, procedure growth, and EPS; ABT reported slight beat to top and bottom line quarterly results; HCSG shares fall, downgraded at Stifel after 1Q results missed estimates, even after adjusting for a $35M write down in accounts receivable related to two corporate restructurings.

Industrials & Materials

· Industrial & Machinery; TXT rises after posting a higher quarterly profit and announced deal to sell tools biz to EMR; WBT upgraded to buy at Longbow saying 1Q18 commercial food equipment survey suggests an acceleration in April business patterns that is likely to carry into 2H; Seaport Global upgradedTEX to buy and $46 tgt saying it has made a compelling case that there’s a multi-year earnings growth cycle ahead and that the 20% share pullback may be unjustified; BMI shares fell after reported lower quarterly profit

· Transports; in rails, CSX the first to report last night, with top and bottom line results beating consensus driven a little by cost, a little by better RPU growth, and a lot by a significant increase in fee revenue; in airlines, UAL reported quarterly results, helped by improved pricing power (follows better DALresults last week); in car rental (HTZ, CAR), Goldman Sachs said survey of airport rental car rates indicated that y/y pricing improved this week, registering a 22% y/y gain

· Metals & Mining; UBS initiating the steel sector with a cautious view, with both AKS and X rated sell and neutral on NUE and STLD – said demand is in structural decline and the recent price rally; industrial metals have surged of late, with big jumps in aluminum following sanctions against Russia (and #2 producer Rusal), lifting AA to best levels in a decade (AA reports tonight).

Technology, Media & Telecom

· Internet; FB downgraded to mixed from positive by OTR Global saying Q1 ad spending is up 19% to 24% YoY versus up 25% to 30% among the same sources in Q4; Morgan Stanley with several changes as upgraded EBAY to overweight as expects the company to start pulling away from PayPal, downgraded GRUB on valuation, ZG downgraded after business model change

· Semiconductors; LRCX shares dip despite record results for revenues, profitability, and shipments, driven by both share gains and market strength – stock weak amid lack of an increase in full year WFE estimate and the forecast for its shipments to decline half-over-half in 2H18 likely disappointed – shares of suppliers UCTT, MKSI, AEIS slip amid the shipment news

· Hardware & Software movers; Dow component IBM shares fell after posted Q1 EPS and rev beat and backed guidance, but miss on margins hits shares/IBM now has two consecutive quarters of rising revenue after ending a losing streak of 22 consecutive quarters of declining revenue; ROKU shares fall after AMZN/BBY announced a collaboration to sell smart TVs equipped with Amazon’s Fire TV operating system, a Roku rival; VMW shares rallied after CNBC report of Icahn buying medium-sized stake

· Comm equipment and networking movers; ADTN posted a wider-than-expected Q1 EPS loss on weaker revenue and one analyst noted cautious commentary about 2H; JNPR was downgraded to sell at Goldman Sachs and cut tgt to $21 saying suggests product and technology transitions in Juniper’s cloud business are only half complete and are likely to reset revenues lower; TEL was upgraded to neutral at Goldman Sachs


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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