Thursday, April 19, 18
Equity Market Recap
· U.S. stocks declined on Thursday, snapping the recent streak of gains for major averages amid weakness in various sectors, specifically semiconductor stocks leading tech lower, and tobacco stocks leading consumer staples lower after weaker earnings/guidance reports. At the same time, Treasury yields jump for a second day as the 10-year yield touches its highest levels in a month and the shorter-term 2-yr holds at 10-year highs while the dollar gained. Interest rate sensitive sectors active given the sharp move in bond yields the last few days on rising rate hike (aggressive) expectations as homebuilders, REITs and Utilities lower early, while banks benefit. Energy prices retreated late day, falling from 3 ½ year highs amid profit taking. Stocks got a late day boost after Bloomberg reported Deputy Attorney General Rod Rosenstein told President Donald Trump last week that he isn’t a target of any part of Special Counsel Robert Mueller’s investigation, and Trump told some of his closest advisers that it’s not the right time to remove either man since he’s not a target of the probe. The headlines pared market losses.
· Specific sector movers: 1) semiconductors decline led by TSM after the company missed numbers and lowered its outlook (dragging AAPL suppliers lower); 2) Consumer Staples a big drag after PM sales missed views, PG guidance disappoints and CLX cut to underweight by one analyst; 3) furnishing space remains weak as PIR lower comps after ETH guide yesterday and BBBY lower forecast last week; 4) Commodities active after earnings results from AA, STLD, and NUE. Banks posting a nice rebound as the sector tries to recover from its week-long selling pressure
· Several factors remain in markets despite investors focusing on corporate earnings this week: 1) inflation fears picking up again amid the recent spike in commodity prices (oil, lumber, nickel, aluminum); 2) trade war fears not completely over as China remains an issue (though market fears have eased related to NAFTA progress); 3) legal issues still linger related to President Trump personal attorney Cohen and the ongoing special investigation from Mueller; 4) macro concerns still an issue with North Korea, Iran and Russia); 5) just this week, some fear related to the semiconductor industry after lower shipment guidance from LRCX, lower guidance from ASML, ASMIY and TSM the last few days; 6) higher yields also may be weighing on sentiment as the yield on the 10-year Treasury bond rose above 2.9%, and the 2-year holds above 2.42%
· Weekly jobless claims fell 1K to 232K vs. est. 230K while the prior week was unrevised at 233K; the 4-week moving average rose 1,250 to 231,250; continuing claims fell 15K to 1.863M in the week ending April 7
· Philly Fed Survey showed Fed’s manufacturing index edged up 1 point to 23.2 in April, topping the 21.0 estimate while the index for future activity dropped to 40.7 in April from 47.9 in March. New orders slipped to 18.4 in April from 35.7 in the prior month. Shipments also dropped to 23.9 from 32.4 in the prior month. Employment index edged up 2 points to 27.1 best level in 6-months
· The 30-year fixed-rate mortgage averaged 4.47%, according to Freddie Mac’s weekly survey. That was five basis points higher than in the previous week, and the highest for the popular mortgage product since January 2014. The 15-year fixed-rate mortgage averaged 3.94%, up from 3.87%
· Oil prices end lower, falling from fresh 3 ½ year highs, with WTI crude falling 18c to settle at $68.29 per barrel (down from highs of $69.56 per barrel). A combination of geopolitical tensions, bullish inventory data, collapse in Venezuelan output and ongoing OPEC-Russia alliance among the latest reasons for rising oil prices. Markets now await the outcome of the joint meeting scheduled for Friday between oil producers and whether OPEC and its allies will signal an extension of supply cuts at their meeting on Friday in Saudi Arabia. Gold prices slip, with June gold down -$4.70 or 0.4% to settle at $1,348.80 an ounce, pulling back from 1-week highs as the dollar moved slightly higher and easing geopolitical concerns have lessened the need for defensive assets as a safe-haven.
· The U.S. dollar gained ground against its rivals, with the dollar index climbing over 0.3% to 89.80 level, moving along with a gain in bond yields. Stronger economic data, rising rate and inflation expectations responsible for the latest move. The euro drops -0.2% to $1.235 (off earlier highs 1.24), while the British pound falls more than -0.8% late day to afternoon lows below $1.41. Bitcoin quietly higher most of the day, holding above $8,200 in crypto sector
· Bonds fell as yields surged for a 2nd straight day as the 10-year Treasury note yield climbed as much as 6 bps to 2.930%, the highest since Feb. 23 (rising 10 bps the last 2-days), while the shorter term 2-yr yield gained a little over 1 bps to 2.440% (highest since 2008), before paring gains. The long bond yield, which has lagged shorter maturities of late played catchup, rising over 8 bps to 3.13%. A combination of rising inflation expectations and better economic data continues to raise possibility of 4-rate hikes from the Fed this year.
Sector News Breakdown
· Retailers; WMT was upgraded to buy and $100 target at Argus; PRTY was upgraded to buy at Bank America citing multiple drivers for better than previously expected same-store sales growth starting in 2019; in mattress retail, SNBR downgraded at Raymond James as reported 1Q EPS below expectations due to topline growth that was below expectations and pressure on margins from investments; IRBT upgraded to overweight at Piper following multiple rounds of online and retail channel checks that lead to believe demand for robotic vacuums is exceeding expectations.
· Consumer Staples very weak; Dow component PG core EPS and sales topped consensus and boosts forecast for year core profit, but said internal sales in an annual basis are now expected to come in at the low end of its 2%-3% guidance; CLX was downgraded to underweight at Morgan Stanley; in tobacco, PMshares plunge after Q1 revenue fell short of estimates and as total shipment volumes were worse than analysts expected; (shares of CHD, COTY, EL, KMB, CLamong those active on the day); PG also agreed to acquire Merck KGaA’s consumer health unit for 3.4 billion euros ($4.2 billion) https://reut.rs/2qHiWaO
· Housing & Building Products; home furnishing sector pressured after PIR posted a comp sales miss and dividend halt, just one day after ETH issued weak preliminary numbers (and recall BBBY shares dropped sharply last week on lower forecast); TTS active after quarterly results; in homebuilders, NVRreported Q1 EPS above consensus views; SNA rises after better quarterly results
· Utilities; SCG shares dropped after the state Senate voted to cut the money Scana can collect from customers for a half-finished nuclear power project the company scrapped last year. Dominion has threatened to call off the merger with Scana should legislators make such a move, and the company reiterated Wednesday that it stands by previous statements.
· Energy stocks strong as oil prices continue to push higher; in stock news; TUSK shares fell following a blackout in Puerto Rico, which involved its unit, Cobra Acquisitions LLC.; KMI shares outperformed behind better quarterly results and a dividend increase
· Banks; CATY results were in line with estimates while expansion was better than expected despite deposit specials; TCBI EPS beat driven by higher spread revenue on back of a 24bp QoQ margin expansion (upgraded at Piper); BXS rises on earnings; 2nd trust bank reports as BK Q1 EPS and revenue topped consensus as equity markets and higher interest rates were important drivers (NTRS reported yesterday and STT tomorrow); regional banks BBT, KEY also outperform on better earnings results; SBNY and UMPQ also movers after results
· Credit cards; active as AXP posted a quarterly beat and forecast boost to the high end of the range/sees FY18 EPS at high end of $6.90-$7.30 view vs. est. $7.12 and sees FY18 revenue growth 8% (shares of V, MA, DFS active); ADS declines after Q1 earnings including a revenue miss and reiterating its year outlook on slowing card sales growth to 3%
· Brokers; Yesterday the SEC voted 4-1 to release proposals that would enhance the standard of conduct for broker-dealers making recommendations to clients, limit the title “advisor/adviser” to registered investment advisors, and create a new baseline disclosure summary document (AMTD, ETFC, SCHWamong those leveraged to news)
· Insurance; ALL announced March estimated pre-tax catastrophe losses of $222M or $175M after-tax/1Q18 pre-tax catastrophe loss of $357M comprised 11 events
· Mortgage insurers MTG and ESNT downgraded to market perform at Wells Fargo, lowers EPS estimates and price targets for both along with RDN, and reduces its sector outlook to market weight from overweight saying the companies seem poised to compete away any benefit from tax reform, at the expense of shareholders
· Large Cap Pharma; ACET shares plunged after saying it was negotiating credit agreement waivers with its lenders, cutting its dividend, taking a large impairment charge and initiating an evaluation of strategic alternatives; LLY and INCY shares drop after an FDA briefing document raised issues with their rheumatoid arthritis drug baricitinib/drug will go up before a FDA arthritis advisory committee meeting on Monday; ZTS downgraded at Hilliard Lyons on valuation while Citigroup raised tgt to Street high $98; Wells Fargo said NVS generic unit shows continued negative data for industry pricing (ENDP, MNK, AKRK, IPXL); an FDA advisory committee voted 13-0 that the benefit-risk profile of GWPH cannabidiol is favorable for the treatment of seizures associated with Lennox-Gastaut syndrome and Dravet syndrome
· Deal news: SHPG shares volatile after Reuters reported Japan’s Takeda Pharma is in negotiations with them after making a third takeover bid worth around $61B that was rejected by Shire https://reut.rs/2HDgnRb ; AGN later confirms in early stages of considering possible offer for SHPG, though has not made an offer – CNBC reported later that AGN would not bid
· Biotech movers; BPTH rises as presented pre-clinical data from studies supporting prexigebersen in treating solid tumors in gynecologic malignancies at the annual meeting of the American Association for Cancer Research; AGLE 4.5M share Secondary priced at $8.00; MOR 8.3M share IPO priced at $25.04; SURF 7.2M share IPO priced at $15.00
· Medical devices and equipment; SIEN announced it received approval from the FDA for its final PMA supplement, which will allow the company to commercialize its breast implant products being manufactured by Vesta; DGX mixed Q1 EPS beats but revs just shy of forecast and reaffirmed its forecast; ALGN downgraded at Morgan Stanley on valuation; DHR posts 1Q results that beat estimates and boosted its year forecast
Industrials & Materials
· Industrials & Machinery; EAF 35M share IPO priced at $15.00; TXT upgraded to buy at Bank America after its stronger than expected 1Q18 operating results, particularly in Textron Aviation; ABB shares rally as reported Q1 order growth across all units, as well as increased sales and stronger margins
· Transports; index falls over -100 points, paring some of yesterday’s 2% gains after UAL and CSX led gains on earnings Wednesday (airlines AAL, LUV, ALKamong top decliners); in rails today, CP shares fell on earnings miss and revenue also short of consensus
· Metals & Mining; in aluminum sector, AA posted a beat and raise quarter with management now saying they see a shortfall in the key raw material used to make aluminum (CENX, CSTM, KALU move in sympathy); in steels, STLD EPS beat consensus and its mid-March guided range 88c-92c on the back of tighter U.S. steel markets, and management noted particularly strong sheet conditions; NUE mixed Q1 as EPS missed but revs topped views and said expects Q2 earnings to increase significantly; BHP trims full-year iron ore outlook
· Chemicals; PPG posted earnings but also said it has launched an investigation after receiving a report alleging violations of its accounting policies; VVV was cut to neutral at Longbow citing the outlook for lower profit margins
· Rentals & Distributors; GWW Q1 results and full-year outlook topped market expectations, helped by increased volume in its U.S. business with both large and medium customers and a strong demand environment (rebounds after last week misses by comps – shares of MSM, WCC, FAST among those active on report); URI shares fell as Q1 operating EPS missed and 1Q gross margin 37.26% missed the est. 39.3%
Technology, Media & Telecom
· Internet; AMZN rises as CEO Bezos highlighted the strength of Amazon’s Prime membership base (100M+ members), AWS’ $20B revenue run-rate and 1,400 new features in 2017, scale of the 3P (third-party) Marketplace (2mn sellers in the marketplace, 300,000 U.S.-based SMBs started selling on Amazon in 2017), growth of Alexa devices and ecosystem, Prime Video awards; EBAY reiterated buy at Citigroup and raises tgt to $58 from $50 as believe eBay shares do not reflect the value of the recently announced new payment solution, which we estimate will increase EPS by 20% in its first full year
· Semiconductors; group very weak amid several data points (AAPL suppliers SWKS, CRUS, AVGO among top decliners); TSM weak as reduced its full-year revenue outlook to the low end of its earlier guidance due to softer demand for smartphones and cryptocurrency-related chips/now sees FY 2018 revenue growing 10% compared with an earlier forecast of 10%-15%; QCOM has reapplied for approval with China’s Ministry of Commerce in pursuit of NXPI and pushed a new deadline of July 25 on the calendar before it will pay the $2B termination fee; ASMIY shares another semi to report disappointing results and a lower forecast
· Hardware & Software movers; AAPL shares weak initially after TSM’s lower forecast and as Mizuho said 3Q revenue guidance could miss at the midpoint on limited upside to 2018 shipping estimates and full valuation; PTC posted revenue and EPS at the high end of guidance and bookings were at the midpoint of guidance
· Media & Telecom; Sprint (S) was upgraded to neutral at Macquarie; LBTYA was upgraded to outperform at Credit Suisse reflecting improving risk/reward rather than an underlying improvement in trends; in towers, CCI shares dropped on higher profit but lower sales
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.