Monday, April 23, 18
Equity Market Recap
· U.S. stocks dropped, with the Nasdaq declining for a third straight day, led by a slide in technology companies, while the Dow Industrials fell for a 4th straight session, the longest losing streak since the four-day stretch ending May 2nd. The dollar rallied to its highest level in more than three months as Treasury yields continue to rise (10-yr neared 3%, its highest level since 2014) before paring the increase. Commodity prices dropped, led by metals such as gold, while aluminum prices plunged after the U.S. softened its position on sanctions against Russia’s United Co. Rusal. Oil prices reversed earlier losses to settle higher. Interest rate sensitive sectors active given the extended surge in Treasury yields, as investors with growing expectations of more aggressive rate hikes this year from the Fed. The attention at this point seems squarely on fundamentals and corporate earnings ahead of a very busy day of upcoming results, with six Dow components reporting in the morning (CAT, KO, MMM, TRV, UTX, VZ), but not before tech giant GOOGL reports after the bell tonight. The macro stories such as the Fed, China trade tariff fears, North Korea, and Russian sanctions have not gone away, and remain in the back of investors’ minds. Economic data was positive amid a rise in Existing Home Sales.
· Existing-Home Sales for March rise 1.1% to 5.6M, topping the 5.55M est by economists; February remained at 5.54M, unrevised; 3.6 month’s supply in March vs. 3.4 in February; inventory rose 5.7% to 1.67M homes; said 1st-time buyers 30% of total sales; all cash 20%; investors 15%
· Markit said its flash composite purchasing managers’ index for U.S. in April rises to 54.8 from 54.2 in March (vs. a year ago 53.2), as new orders rise to 58.3 vs 56.9 in March (highest reading since March 2015);
· The Chicago Fed’s index of national economic activity was a positive 0.10 last month, down from the upwardly revised positive 0.98 in February. February’s result was the highest marker for this volatile index since positive 1.19 in October 1999
· Oil prices end higher; WTI crude reversed higher, rising 24c or 0.4% to settle at $68.64 per barrel (well off earlier lows of $67.14 per barrel), back near the 3 1/2-year highs of last week. The stronger dollar was responsible for lower prices initially, but with OPEC trying to keep production down to prop up prices after comments last week, prices found their way higher.
· Gold prices dropped as safe haven assets continue to pullback amid easing geopolitical tensions between the U.S. and Russia/China; a surge in the dollar also weighing on commodity prices, as the dollar moves to best levels since early March, clipping gold prices by -$14.30, or 1.1%, to settle at $1,324 an ounce, its lowest settlement in about a month. Gold prices are now down more than 2% since hitting a 2 ½-month high of $1,360 as recently as April 11. For last week, gold futures fell by roughly 0.7%, the first such loss in three weeks.
· The U.S. dollar posted big gains on Monday, helped as the yield on benchmark Treasuries threatened rose and U.S. stocks were mostly higher. The dollar index (DXY) topped its 100-day resistance level for the first time since late last year (90.75), rising to best levels since early March. The greenback jumped against the safe-haven yen, rising nearly 1% and touching its best levels since mid-February (108.75). The pound dropped as U.K. Prime Minister Theresa May battled to avert a cabinet revolt over Brexit. Bitcoin prices rise another 4% after last week’s strong gains; Bitcoin back above the $8,900 level (earlier briefly topped $9,000). The dollar rose around 1.5% to its strongest since early March against Mexico’s peso. The euro fell to 1.22.
· Treasury markets extend recent decline as yields rise across the board on increasing aggressive U.S. interest rate hike expectations from the Fed to four times in 2018, rather than the three signaled by policy makers previously. Easing geopolitical risks are also reducing interest in “safe-haven” assets after North Korean leader Kim Jong Un said Saturday that his country would shut down its nuclear test site and suspend testing of long-range missiles. The yield on benchmark 10-year topped 2.99% earlier, its best levels in over 4-years, while the shorter-term 2-yr yield rose above 2.47%.
Sector News Breakdown
· Retailers; several research ratings changes today in group; toy retailer HAS quarterly earnings missed estimates but shares bounced off lows; Deutsche Bank said they prefer global apparel, handbag, and footwear brands within coverage as they upgraded KORS to buy, and said PVH top pick, while they upgrade UAA to neutral from sell; HBI upgraded to buy at Stifel with a $23 target; SHLD shares jumped after ESL Investments, the investment firm controlled by Sears CEO Edward Lampert, proposed to the board it consider a deal for the firm to buy certain real estate, the total or partial sale of the rights to the Kenmore brand and assets, and all of the Home Improvement Business of Sears Home Services Division; LULU was downgraded to hold at Needham on valuation; IRBT stock falls after report that Amazon is working on home robots
· Consumer Staples; after underperformance last week on back of results from PM and PG, the consumer staples sector received a better-than-expected Q1 report from KMB today; GIS received a positive mention in Barron’s this weekend; NWL in agreement with Starboard Value to end current proxy contest/names two independent directors Gerardo I. Lopez and Robert A. Steele immediately to board; 52-week lows for several S&P components, many in consumer space: CL, PEP, KMB, KHC, PG, CLX, PM among them
· Restaurants; QSR downgraded at Stifel citing ongoing bad press around Tim Hortons, which has seen a rise of infighting between franchisees amid the cost-reduction efforts of QSR (QSR traded to 52-week lows today)
· Casino, Lodging & Leisure; Cruise operators CCL, RCL and NCLH can offer nice yields and solid dividend growth, but economic downturns can pressure payouts, Barron’s reported; MGM upgraded to outperform at Susquehanna to positive
· Oil Equipment, E&P and Services; FTK shares plunge after warning that it expects to report negative EBITDA for Q1 and forecasts revenues of $59M-$62M, below the $73M analyst consensus; OAS downgraded to sell from hold on valuation and forward questions over pace of Delaware activity and core Bakken locations; service space saw Q1 EPS beat by HAL after mixed results from SLB and BHGE on Friday as HAL sees strong sales and margin growth for completion and production in 2Q
· Integrated Oil and Gas; Raymond James upgraded XOM to Market Perform noting the stock has been a useful source of funds throughout the oil market recovery over the past two years, but think that this relative short has largely run its course, while form downgraded PBR to underperform amid outperformance and upgraded YPF to Strong Buy as the firm raised its oil price forecast for 2018, 2019
· Utility & Solar sector; one deal to note as CNP agrees to acquire VVC for $72 per share in cash, a premium of nearly 10% over Friday’s closing price https://prn.to/2K7MvL5 ; in earnings, FE Q1 EPS missed by a penny though guidance came in above consensus views; in solar, SPWR was downgraded to underperform at Bank America and tgt to $7 from $8.50, citing concern over the impact of import tariffs to SPWR’s premium businesses
· MLP sector; Barron’s noted energy infrastructure MLPs look cheap as oil and gas production rebounds and earnings rise and said names like EPD, MMP, MPLX, PAA could reward investors with higher yields as cash flows rise; overall, MLP sector strong despite a pullback in oil prices and the rise in Treasury yields
· Large Cap banks were mostly lower despite the sharp spike in Treasury yields today, ahead of a busy week of earnings for regional banks (FITB, HBAN, SNVtomorrow); STT shares upgraded at Deutsche bank to buy helping the stock recover after falling Friday after posting quarterly results that included lower AUM data
· REITs; Morgan Stanley said believe the sell-off in the Data Center stocks is overdone and has created attractive opportunities/CONE and DLR both offer dividend yields >3.5% with upside of 37% and 15% respectively above com’s tgts; overall, a quiet day for REITs (IYR) as the yield on the 10-year jumps above 2.99%
· Pharma movers; AKRX shares dropped over 30% as Fresenius SE (FMS) said it had decided to pull out of its planned acquisition for the company after it found data integrity breaches at the U.S. generic drug maker. Fresenius agreed last year to buy AKRX for about $4.75B but said recently it could terminate the deal if its own independent probe found Akorn breached U.S. FDA data integrity https://reut.rs/2qQVY0c; MRK rises after Goldman Sachs upgraded to buy, meanwhile BMY share fall for a 9th straight session
· Biotech movers; PRTA shares plunge after it terminated development of NEOD001 for the treatment of AL amyloidosis as Phase IIb PRONTO study did not meet its primary or secondary endpoints and the Phase 3 VITAL Amyloidosis study is being discontinued based on futility analysis; CRSPR stocks fall (CRSP, NTLA, EDIT) after Merck KGaA receives patent for CRISPR technology. The CRISPR technology allows for precise chromosome modification in living cells, said Merck. Its applications range “from identifying genes linked to cancer and rare diseases to reversing mutations that cause blindness,” the company said.
· Healthcare services; HSIC shares active after the company said it will spin-off its animal health unit and merge it with Vets First Choice to create a new company; HUM, TPG Capital and Welsh, Carson, Anderson & Stowe have agreed to acquire privately held hospice operator Curo Health Services for ~$1.4B/HUM will have a 40% interest in company; CERN upgraded to buy at Citigroup with $71 tgt saying the DoD and VA are embarking on electronic health records upgrade projects worth greater than $14B
Industrials & Materials
· Industrial & Machinery; CBI shares fell after MDR confirmed that it had rejected an unsolicited buyout bid by Subsea for $7 per share, but said remains “fully committed” to completing the deal to buy CBI as planned; CAT upgraded to buy at Citigroup saying shares can outperform over the next 6-12 months on positive estimate revisions, increased capital returns and improving China macro data points; JBT downgraded to neutral at Baird on valuation; ARNC downgraded to neutral at Longbow Research on reduced near-term earnings visibility
· Transports; KSU was upgraded to buy at BMO Capital saying the company is the best-positioned growth story in the rail sector, citing demand from multiple commodity segments; in airlines, ALK shares rally after earnings results and expects available seat miles to increase 8.5% during Q2 and be 6.5% higher for the full year, down from a prior view of +9.5% for Q2 and +7.5% for 2018; WAB upgraded to buy at Stifel saying the possible transformative GE Transportation deal improves risk-to-return
· Metals & Mining; group volatile, especially weakness in aluminum stocks AA, CENX after Bloomberg reported the U.S. says it may relieve Rusal sanctions if Oleg Deripaska divests control in the Russian producer; gold miners have been sliding in recent days as gold prices pullback from 52-week highs more than a week ago (ABX, NEM, AEM)
Technology, Media & Telecom
· Internet; group into the heart of earnings this week, with GOOGL reporting after the close tonight, EBAY, FB, TWTR Wednesday 4/25, AMZN Thursday 4/26, which follows strong results from NFLX last week
· Semiconductors; Philly semi index (SOX) slips on the day; MU among top decliners after UBS said they are concerned about Micron’s potential share loss in 2019 for both DRAM and NAND (firm maintained sell rating); AAPL suppliers (SWKS, CRUS, QRVO) have pulled back over the last week as more analysts have cautioned ahead of the quarter citing lower demand; Evercore said for semi’s that memory fears are “vastly overdone,” supply/demand for both DRAM and NAND chips will continue to be tighter than expected (recommends NVDA, MU, ADI, LRCX, ASML, AMAT)
· Other tech movers; BOX shares jumped midday after Social Capital’s Chamath Palihapitiya recommends going long on the stock at the Sohn Conference in New York; OKTA was upgraded to buy at Canaccord; PANW a positive mention at the Sohn conference in NY by Glen Kacher, the founder and chief investment officer of Light Street Capital Management
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.