Tuesday, April 24, 18
Equity Market Recap
· U.S. stocks dropped, led lower by a handful of weaker earnings and/or guidance reports from market bellwethers, sending the Dow Industrials down by more than 750 off its intraday highs of 24,579, before paring losses. With today’s decline, the Dow Industrials has now fallen 5-consecutive sessions (longest streak since March 2017), led by weakness in MMM after lowering its yearly forecast, TRV after saying losses from natural disasters were above $300 million for the fifth straight quarter, and from CAT, which posted strong quarterly results and upward guidance…but warned that it sees Q1 as its “high water mark” for the year and said expects resource industry margins to come down from Q1. Those three names were responsible for nearly 200 Dow points. Boeing shares dropped more than 3%, falling in sympathy with defense company LMT after its guidance failed to inspire investors (BA reports tomorrow morning). Couple the weaker earnings reports with rising Treasury yields and inflation expectations, and you have yourself a shaky market. Tech also underperformed after Internet giant GOOGL quarterly results topped consensus, but higher spending dented optimism going forward. The Dow Industrials dropped below the 24K mark and the Nasdaq Composite below 7K, while the S&P 500 came close to testing its 200 day moving average support again (around 2,608). Another busy night of earnings upcoming with: AMGN, COF, TXN, WYNN among them and tomorrow morning: ANTM, BA, BSX, CMCSA, GD, HES, NOC, NSC, TWTR and VIAB.
· March new home sales rose 4% to 694,000 annual rate, topping the 630K estimate; the previous three months’ new home sales data revised up by 62K; median new home price rose 4.8% y/y to $337,200; average selling price at $369,900
· Richmond Fed’s April manufacturing survey weak, falling to -3 vs 15 last month and the 16 estimate; shipments fell to -8 after 15 the prior month, while new order volume slowed to -9 after 17 the prior month and order backlogs fell to -4 after 10 the prior month; Inventory levels of finished goods increased to 15 after 5 last month
· Consumer confidence in April rose to 128.7 vs. 127.0 prior month and above the 126.0 estimate; the present situation confidence rose to 159.6 vs. 158.1 last month, while the consumer confidence expectations rose to 108.1 vs. 106.2 last month
· S&P CoreLogic Case-Shiller National Home Price index rose 6.34% y/y in Feb. after rising 6.11% in prior month; the S&P/Case-Shiller 20-city NSA index at 206.67 after 205.16 in Jan.; 20-city SA index rose 0.83% m/m in Feb. after rising 0.81% the prior month; National home price index rose 0.51% m/m in Feb. after rising 0.57% the prior month
· Oil prices erased earlier gains, with WTI falling 94c, or 1.4% to settle at $67.70 per barrel, falling alongside stocks ahead of inventory data tonight (API) and tomorrow morning (EIA). Brent settled at $73.86 per barrel, falling after crossing $75 for the first time since late 2014 as tensions between Saudi Arabia and Yemen heated up. Speculation that U.S. sanctions on Iran will be put back in place in May also lifted crude futures, as they could contribute to a tightening in global oil supplies, but the “risk-off” attitude late day for risky assets sent prices lower. Gold prices closed higher, with June gold futures climbing by $9, or 0.7%, to settle at $1,333 an ounce, snapping a 4-day losing streak as the dollar and US stocks slid, with investors looking for safe haven assets.
· The greenback slipped; the U.S. dollar index took a breather after rallying the last few sessions, with the DXY falling about -0.2%, losing ground against the euro and Pound. The dollar erased gains against the “safe-haven” yen, falling to the 108.60 level, pulling back after touching 2-month highs of 109.20 earlier. Data today was mixed with better new home sales, but softer manufacturing data. Bitcoin prices up another 4%, trading as high as $9,412 before paring gains, with Bitcoin up 20% over the last 10-trading days.
· Treasury market’s opened lower as yields rose, with the 2-year yield touching 2.50% for the first time since September 2008, while the benchmark 10-year yield topped 3% for the first time since 2014. However, despite the aggressive sell-off in stocks today, bonds never really rallied meaningfully, with the 10-year only sliding to yesterday closing levels just under 2.98%. Bonds have sold off the past week amid increased concerns over growing inflationary pressures and rising expectations the Fed will get more aggressive in their rate hike outlook. Mid-afternoon, the U.S. Treasury sold $32B in 2-year notes at a yield of 2.498% vs. 2.493% pre-sale when-issued prior to auction, with the bid-to-cover (demand) coming in at 2.61 vs. 2.91 in prior auction and indirect bidders awarded 41.6% of auction.
Sector News Breakdown
· Housing & Building Products; homebuilders got a boost after PHM Q1 results easily topped consensus estimates, while March new home sales data also a positive for the industry as New Home sales rose to 694K, topping the 630K estimate (DHI, MDC, TMHC, MHO rise); building product stocks sink after MAS reported weaker than expected profit margins (shares of AMWD, LII, FBHS moved in reaction); in appliances, WHR shares outperform despite missed results as EPS and revs missed estimates with miss from EMEA according to one analyst while NA organic growth was in-line/also sold its Embraco compressor business to Nidec for $1.08B; in paint space, SHW EPS and revenue topped estimates, but posted a weaker year outlook
· Consumer Staples; beverage giant and Dow component KO Q1 EPS beat by a penny on higher sales and says on track to deliver full year targets, driven by 2H performance; Staples still fell as a whole for a 5th day, as concerns about margins have taken a toll on various names (PG, PM, KMB)
· Restaurants; TXRH was downgraded to market perform at BMO Capital on valuation; QSR bounced off 52-week lows reached yesterday as profit gains at its Burger King unit helped the company top quarterly estimates
· Auto movers; ABG Q1 beat on the top and bottom line, helping auto retailers; AMZN has partnered with GM and Volvo Cars to deliver packages to car trunks in 37 U.S. cities
· Consumer services; HSII shares jumped on Q1 EPS and revenue beat while its guidance for Q2 also topped estimates; EDU Q3 EPS and revs topped estimates;
· Energy stocks quiet on earnings front thus far, but big week coming up with XOM, CVX and COP expected later in week; in services, WFT posted Q1 Ebitda of $151, topping consensus around $130M; SRCI falls early as 1Q preliminary production 45.4mboe/d missed estimates (downgraded by one analyst); the Alerian MLP Index (AMZ) slips over 2%, back down below the 260 level, led declines in NGL, TEP and EEP…only a few gainers, with HCLP and CVRR rising early
· Large Cap banks and regional benefit from spike in treasury yields and better earnings results; regional banks with earnings: FITB rises on strong 9c EPS beat on higher NIM 3.18% and lower provisions for loan losses; SNV same as FITB, beating by 7c with higher NIM 3.78%; HBAN Q1 EPS in-line with estimates at 28c; Other banks on earnings; BANR, BHLB, BPOP, WSFS, HMST (falls on EPS/rev miss), ZION also gains after results; AMTD fell in broker space after earnings
· Insurance; Dow component TRV slides amid higher catastrophe costs following several natural disasters last year/said losses from natural disasters were above $300 million for the fifth straight quarter, leaving profit short of analysts’ estimates; bond insurer AGO shares volatile after David Einhorn of Greenlight Capital recommended shorting Assured Guaranty yesterday at the Ira Sohn hedge fund conference as argued that AGO’s internal ratings for various municipal exposures were too optimistic and also stated that implied losses for Puerto Rico could be $2.8 billion
· Payments and lending; PYPL and EBAY confirm signing of previously-announced new payments; shares of CIT and SLM both movers on earnings results; Auto lenders gain as SC surged as much as 17% after Q1 results beat estimates, with continuing credit stabilization and higher originations (ALLY, CACC also moved in reaction); COFreports after the close
· Large Cap Pharma; SHPG it has received a further proposal from Japan’s Takeda Pharmaceutical Co. and is considering its position after rejecting four earlier proposals (offer last Friday was GBP47 a share, including GBP21 a share in cash and GBP26 a share in equity) https://on.mktw.net/2qWqmY3 ; MNOV said primary endpoint of whole brain atrophy, MN-166 (ibudilast) demonstrated a statistically significant 48% reduction in the rate of progression of whole brain atrophy compared to placebo; LLY posted earnings that beat and boosted revs outlook, also baricitinib wins FDA panel nod, but still dogged by safety issues
· Biotech movers; EPZM shares dropped after the FDA has instituted a partial clinical hold on all of its tazemetostat trials on a report that a pediatric patient developed a secondary lymphoma; INCY and LLY said an FDA advisory panel voted 10-5 in favor of its experimental drug for rheumatoid arthritis, Olumiant (baricitinib), recommending approval for the 2mg dose only while committee voted 5-10 against approving the 4mg dose, asking for more clinical data; in earnings, BIIB Q1 revs in-line with estimates, while market awaits AMGN tonight
· Medical devices and services; life science tools weak as WAT shares fell after posted Q1 EPS miss of 9c on lower than expected sales of $530.7M (TMO, PKI, BRKRamong movers in sympathy); TVTY posted a small miss primarily driven by adverse winter weather and a severe flu season during the first two months of the quarter which depressed gym visits by members; HSIC downgraded at Goldman Sachs as they are cautious on dental companies
Industrials & Materials
· Machinery; Dow component CAT Q1 results beat and the company raised its full-year profit forecast, citing strength in many of its end markets and strong cost control/CAT also said better-than-expected sales volume is the primary driver of the raised profit outlook, with higher volume expected across the three primary segments – CAT turned lower during its c/c saying says Q1 operating margin rate won’t repeat and that it sees Q1 as its “high water mark” for the year (shares of ASTE, MTW, DE, WCC active on report)
· Industrial & Multi industry movers; MMM Q1 results mostly in-line but cut its earnings per share forecast for the full year, as shares fell over 7% early weighing on the Dow; in lighting space, German company Osram cut its 2018 profit guidance citing FX and slower business in 1H (shares of CREE, AYI, HUBB dipped on the comments ahead of earnings tonight); CR shares dropped after quarterly results
· Heavy duty truckers; PCAR Q1 earnings and sales top estimates and raised its estimate of 2018 Class 8 truck industry retail sales for the U.S. and Canada, but shares dropped as margins disappoint and peak demand concerns return (shares of CMI, NAV, ALSN, WBC also active)
· Aerospace & Defense; UTX raised its 2018 profit forecast and reported first-quarter results far exceeding expectations; in defense, LMT boosted its sales forecast for the year, after Q1 EPS and revenues handily topped consensus views but failed to boost FCF outlook; ATI topped Q1 estimates, lifting shares (aero suppliers HAYN, CRSactive); shares of BA, GD report tomorrow morning in defense; HXL shares rally after quarterly results and reaffirmed guidance
· Packaging and containers; OI reported an essentially in-line 1Q18, guided in line for the 2Q, and maintained its full-year guidance as volume was flat, pricing offset cost inflation; GPK shares declined despite Q1 EPS and revs topping consensus views
· Transports; in rails, CNI lowered its yearly earnings forecast saying the additional spending required to ease bottlenecks will weigh on profit; Dow Transports fell as much as -280 points (2.6%), dropping back below its 50 day MA support of 10,450 earlier with all 20-components lower, led by R -7% after earnings, ALK in airlines, and rails KSU, UNP
· Metals & Mining; FCX lowered its copper sales, operating cash flow guidance, and raising cost view for the year and also cut 2018 operating cash flows to $5.6B vs $5.8B previously; VALE downgraded at RBC Capital as expect that iron ore markets are likely to come under further pressure over the coming months; AA downgraded at Citigroup citing valuation
Technology, Media & Telecom
· Internet; GOOGL strong 1Q18 results, with a comfortable revenue/EPS beat despite higher opex/ revenue growth accelerating to the best level seen since 2014, though margins were below expectations by 200bps and capex spend elevated (capex fears weighed on stock); AMZN gross profits would be slashed by $1.3B, or 1.4%, in a base-case scenario where the U.S. Postal Service boosted parcel rates, according to Citigroup
· Semiconductors; INTC positive mention at Citigroup saying data center business should grow 14% this year and every 1% of growth boosts EPS by 3c as firm raises revenuer outlook and tgt to $60; Mizuho downgraded SWKS to neutral while staying at buy on AVGO and SYNA, saying believe the effects of a maturing handset cycle could start to impact the RF suppliers; MU active after Hynix echoes TSM and AMS AG in warning of slowing mobile demand after reporting overnight
· Software and services; CDNS shares jumped after reported and guided Rev/EPS for C1Q and C2Q above Street estimates (upgraded at Needham); in EMS sector, SANM shares jump with Citigroup (wo raised EMS sector rating) saying believe SANM’s results is the first indication for our phase 3 EMS cycle thesis which is positive to EMS sector; SAP raised its yearly forecasts
· Media & Telecom; Dow component VZ posted good operational results and tight opex management with easy comps and tax tailwinds to deliver solid 1Q18 results; DISCA was upgraded to buy at Deutsche Bank saying now is an opportune time to buy the stock ahead of earnings/2018 guidance on May 8th
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.