Friday, April 20, 18
Equity Market Recap
· U.S. stocks ended the day lower, falling near its worst levels of the session in the final hour, led by a broad decline in technology (semiconductors), consumer staples and interest rate sensitive sectors. Rising Treasury yields weighed on stock-market sentiment as the yield on the 10-year Treasury note rose above 2.95% (back to 2018 highs – and highest since January 2014) while the 2-year rises above 2.44% amid increased expectations the Fed will get more aggressive in its rate policy). The rising yields, coupled with the recent surge in commodity prices (oil 3 /12 year highs, nickel 3-year highs, aluminum surge) have boosted inflation concerns as well. Shares of Dow component Apple Inc. (AAPL) fell over 4%, cutting about 50 points from the average as Wall Street analyst get cautious ahead of earnings based on its deteriorating outlook in China. With the late day pull, the S&P 500 and Dow Industrials erase their YTD gains. Chipmakers faltered again, with the semi index falling over 6.5% the last 3-days amid various concerns and profit warnings (TSM, ASMIY). Consumer Staples also a drag on markets the tail end of the week, with 52-week lows for several names PEP, MAT, CPB, KHC, CLX, PG, LB, TAP, KMB) as earnings results and guidance thus far disappointing amid sales and margin pressures. It was a rocky week of earnings, some good/some bad, as investors focused on market fundamentals (for a change), instead of the geopolitical and Washington distractions it had been trading on prior.
· Oil prices end the day little changed, but higher on the week; WTI crude rises, with the June contract up 7c at $68.40 per barrel, while the expiring May contract gained 9c to $68.38 per barrel (up 1.5% this week). Prices dropped to lows of $67.50 after President Trump said on Twitter, blaming OPEC for “artificially high” prices. Trump said “Looks like OPEC is at it again. With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!” Prices fell initially before paring losses. Crude hit a 3 ½-year high earlier this week ahead of a meeting by members of the joint OPEC and non-OPEC ministerial monitoring committee meeting that was today.
· Gold prices slumped on Friday, down -$10.50, or 0.8% to settle at $1,338.30 an ounce following a rebound in the U.S. dollar, and posted a loss of (-0.7%) for the week, its first loss in three weeks. Silver prices slipped 7.6c, or 0.4%, to $17.163 an ounce, pulling back from its own 2 ½-month high, hit in the previous session (gained 3% this week). The contract saw a 3% gain for the week.
· The U.S. dollar index (DXY) traded to 2-week high, touching highs of 90.47 before pulling back, bringing its weekly gain to roughly 0.5%, boosted by rising Treasury yields and a decline in the Pound and rising inflation expectations. The Pound fell around -0.5%, but held the 1.40 level (2-week low) after Bank of England Governor Mark Carney hinted the U.K. central bank may hold off on raising interest rates next month. Crypto currencies advanced as Bitcoin prices gained another 3% to above $8,500, it’s the strongest level in about a month.
· Treasury prices extended its drop, sending yields markedly higher the last few days as consensus growing that the Fed is likely to get more aggressive in lifting interest rates in 2018 (four rate hikes vs. three initially). Investors also paring back on bonds given the easing of geopolitical concerns over the last seven days with Russia, Syria and China (re: trade). The benchmark 10-year Treasury yield gained around 3 bps to above 2.94% (vs. 2.828% late last week). The 2-yr yield gained over 1 bps to new 10-year highs above 2.44% and the 30-year bond yield rose to 3.13%. The minutes from the March Fed policy meeting highlighted the central bank’s willingness to tighten monetary policy, but before this week, a few investors were still unsure about how much of that view was shared among all the members of the FOMC.
Sector News Breakdown
· Retailers; in footwear, SKX shares plunge (downgraded at Wedbush) as Q2 forecast misses analysts’ estimate, guiding EPS 38c-43c, below the 54c estimate and sees revs $1.12B-$1.15B also below the $1.16B citing expected shift in shipments from the qtr to the back half of the year; SHOO Q1 results beat but guided year profit below estimates; in toy retail, MAT shares fall on management shake-up as Executive Chairman Ynon Kreiz replacing Chief Executive Officer Margo Georgiadis, who stepped into the role just 14 months ago
· Consumer Staples; PF shares jumped after JANA Partners announced they have taken a 9.5% stake and is calling for the company to improve its operations, improve its capital allocation, and consider strategic alternatives including selling itself; CLW shares plunged as Q1 EBITDA below the low end of its guidance range and guided well below consensus for 2Q18 as continues to experience price erosion and significant cost inflation in its tissue business; PGdowngraded by at least three analysts after falling yesterday on sales and margin pressures and PM downgraded and tgt cut by several analyst citing the IQOS Q1 volume miss and more cautious tone on IQOS trajectory in Japan (PG and PM earnings/guidance yesterday responsible for Staples drop); KR closed the sale of its convenience store business to EG Group for $2.15B and said it would use $1.2B for an accelerated share repurchase plan
· Housing & Building Products; SWK shares among top decliners in the S&P 500 after quarterly beat, but only reaffirmed guidance/disappoints after comp SNA better results yesterday; in appliances, WHR reports this upcoming Monday; home furnishing stocks mixed after a rough week, with lower guidance from BBBY, ETH and PIR
· Energy stocks dropped in reaction to a slide in oil prices after President Trump in an earlier tweet said “Looks like OPEC is at it again. With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!” Prices dropped from 3 ½ year highs while energy stocks dipped
· Oil services in focus as SLB and BHGE report earnings; SLB Q1 EPS and revenue just topped consensus estimates but said production challenges in U.S. shale are emerging due to drilling wells too close to each other and exploring lower-quality areas; BHGE Q1 results mixed as EPS beat on slightly lower than expected revs; note HAL reports Monday morning
· Pressure pumping stocks (RES, PUMP, FRAC, CJ) active after SLB said its U.S. land pressure pumping business was hurt by weaker-than-expected activity, as well as by softer pricing, inefficiency, rising supply chain costs, and rail logistical challenges
· Separately, Baker Hughes showed the total U.S. rig count rose 5 rigs to 1,013, with oil rigs up 5 to 820, gas rigs unchanged at 192, and miscellaneous rigs unchanged at 1
· E&P sector; SN shares fall after said Q1 production of 80,572boe/d missed Bloomberg est. of 82k boe/d, while 2Q guidance of 80k boe/d-84k boe/d missed est. of 87k boe/d; Morgan Stanley upgraded WLL to equal weight from underweight given strong fundamentals, well performance, management strategy, while cautious on PE into 1Q earnings given potentially light 1Q volumes and/or 2018 guidance (said top picks on this are ECA, EGN, XEC, CLR)
· Large Cap banks; WFC will pay $1 billion to settle U.S. probes into the mistreatment of consumers, which included forcing unwanted insurance on customers who took out car loans; another busy day for bank earnings, especially in regionals with STI, CFG, RF, ASB (upgraded by two analysts after earnings); Separately, STI said it is now offering Identity Protection for all current and new consumer clients at no cost on an ongoing basis resulting from potential contact data theft; in trust banks, STT shares fell after earnings; in brokers, ETFC advanced on solid Q12 top and bottom line beat; SBNY was upgraded at Wells Fargo and PBCT upped at Piper
· Cards and Services; card sector got a yesterday after better earnings results/guidance from Dow component AXP; today SYF Q1 EPS beat by 8c on better NIM though 1Q net charge-offs as a percentage of total average loan receivables were 6.14% compared to 5.78% q/q and 5.33% y/y. In services, TRU reported earnings and also reached agreement to acquire Callcredit, a U.K. credit and consumer data business for $1.4B https://on.mktw.net/2F38uim
· REITs; MAC shares active after confirmed reports late yesterday that Art Coppola will retire from his position as Chairman and CEO of the Company effective December 31, 2018 (two analysts upgraded MAC following the news)
· Large Cap Pharma; after a very busy week of news and data, the healthcare space relatively quiet today; SHPG volatile for a 2nd day after Takeda Pharmaceutical Co. sweetened its offer for the drugmaker to more than $60B, boosting its offer to 47 pounds ($65.84) a share after its 46.50 pounds a share proposal was rejected https://bloom.bg/2HgYLuY ; in biotech, IONS shares rallied after BIIB said it would take a 9% stake in its pharma partner in a $1B deal, paying $625M for 11.5M shares at $54.34, making BIIB IONS’s second largest holder; in services, CHE shares jump following earnings results; RIGL 16M shares offering priced at $3.90 per share
Industrials & Materials
· Industrial & Machinery; Dow component GE posted slightly better quarterly earnings, but shares rallied after the company reaffirmed its year profit outlook after several analysts warned they would likely cut; HON posted stronger quarterly results and raised its year sales guidance to $42.7B-$43.5B from prior $41.8B-$42.5B (est. $42.37B); HRI downgraded to sell at Goldman Sachs Neutral relative to their Attractive Machinery coverage view with 3% upside to 12-month price target for HRI vs. 26% upside for Machinery coverage on average
· Transports; after a strong week of gains following better earnings (CSX, UAL), group slips slightly early; KSU posted Q1 EPS and revenue miss; in truckers, WERN Q1 EPS and revenue topped consensus on stronger pricing according to analysts; MRTN results were in-line with estimates, while Stephens downgraded on valuation
· Metals & Mining; CLF shares rose after it beat earnings estimates and raised its sales forecast, becoming the latest producer to show confidence in U.S. steel demand strength; shares of steel names rallied recently on strength in commodity prices along with reports from STLD and NUE; aluminum prices have surged on supply concerns given US sanctions against Russia and its impact on number 2 producer Rusal (AA also posted strong results yesterday)
Technology, Media & Telecom
· Internet; TWTR was upgraded to buy at MKM Partners with $40 tgt saying they are encouraged by a rebound in user growth with DAUs up double-digits for five quarters, but also by sustainability of the network’s competitive position; big week upcoming for Internet sector related to earnings with GOOGL Monday 4/23, EBAY, FB, TWTR Wednesday 4/25, AMZN Thursday 4/26, which follows strong results from NFLX this week
· Semiconductors; sector has been dragging tech lower over the last week, with the Philly Semi index (SOX) having fallen (coming into today) 11% from its March 12 high but it’s still up 2.6% far this year; one analyst notes AAPL earnings could be the turning point after TSMC’s results cast a shadow on iPhone demand (top AAPL suppliers include AVGO, CRUS, QRVO, SWKS)
· Software movers; TEAM Q3 revenue and EPS came in above street expectations, but deferred revenue and forward Q4/FY EPS guidance came in below expectations; LLNW shares rise after Q1 results top views and raise guidance on improved product quality and margin trends; PVTL 37M share IPO priced at $15.00
· Hardware movers; AAPL shares tumbled as much as 4%, falling after Morgan Stanley the latest with cautious comments saying they forecast in-line March Q but see downside to June consensus estimates following iPhone build cuts and weak China data (AAPL was also downgraded to mixed by OTR Global); ERIC shares rallied after quarterly results
· Media & Telecom; Bloomberg reported the U.S. FCC faced skeptical questioning from judges about a rule change that made way for SBGI’s proposed acquisition of TRCO, raising the possibility of turmoil for the $3.9B deal https://bloom.bg/2Heynh7 ; the NY Times reported late day that U.S. investigating wireless collusion claim against AT&T, Verizon
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.