Wednesday, April 25, 18
Equity Market Recap
· U.S. stocks were volatile, rebounding from earlier weakness but ended the day far off its best levels as markets continue to weigh the impact of quarterly earnings (which have come in stronger than expected, but guidance outlooks have shaken investor confidence), the impact of a rising dollar (more than 3-month highs) and a recent surge in Treasury yields (10-yr yield at 4-yr highs). Today however was all about earnings, with no Fed speakers ahead of next week’s FOMC rate decision, or economic data, though China boosting its limit on foreign investment for the first time in three years received some market attention. Emerging-market stocks neared a new low for the year as U.S. Treasury yields and the dollar rise, according to Bloomberg. The Dow Industrials bounced more than 300 points off its lows, led by shares of Boeing which posted stronger quarterly results and raised guidance, while GE was the biggest decliner on a credit downgrade. The tech heavy NASDAQ also bounced 100 points off its intraday lows ahead of a busy night of earnings that include FB, AMD, EBAY, QCOM in tech space along with T, PYPL, CMMG, F, LVS and X. With today’s gains, the Dow snapped its longest losing streak in a year (5-days), though the Nasdaq extended its losing streak to 5-days.
· Oil prices rose despite sliding earlier on bearish inventory data. The American Petroleum Institute (API) reported that U.S. crude supplies rose 1.1M barrels for the week, while the DOE posted an unexpected build of 2.1M barrels, compared to the -2.2M draw expected. Oil prices initially dipped following the data, but managed to rise 35c to settle at $68.05 per barrel. Lower refinery runs and higher imports created a build to crude stocks, but it wasn’t enough to keep prices down. WTI crude bounced off lows of $67.11, which was around 1-week lows.
· Gold prices slipped on Wednesday, falling -$10.20 or 0.8% to settle at $1,322.80 an ounce, its lowest close in about 5-weeks, given strength in the U.S. dollar and Treasury yields and some gains in the stock market.
· The U.S. dollar advanced, extending its recent gains and moving to a more than three-month high amid strength in bond yields and a more aggressive outlook for interest rate hikes from the Fed. The dollar index traded up over 0.5% to highs of 91.24 as the 10-year US treasury edged higher after topping 3% for the first time in four years amid rising expectations for a continued uptick in inflation, economic growth and Federal Reserve interest rate increases. The dollar traded to highs above 109.35 vs. the Japanese yen as investor’s flea save haven assets (moved above the 100-day resistance of 108.98), while the euro slid to 1.2175. Bitcoin prices fall over 5% after its recent run higher, moving back under $9,000.
· Treasury yields advanced further, as the benchmark 10-year yield topped 3.03%, rising more than 3 bps to its best levels since 2014, and the shorter term 2-year remains just shy of the 2.50% level. The jump in rates weighed on stock markets early amid fears of rising borrowing costs, mortgage rates and the impact to consumers/borrowers. The U.S. Treasury sold $35B in 5-year notes at a yield of 2.837% compared to 2.838% when issued prior to auction, at a bid-to-cover of 2.49 vs. 2.50 prior and indirect bidders awarded 60.2%. There was no major economic data today to sway bond markets that have been in a downward trend over the last 2-weeks.
Sector News Breakdown
· Consumer Staples & Restaurants; 52-week lows for two Dow components today KO and PG, as Staples continue to lag broader market, along with several S&P components FBHS, PEP; SVU rises on earnings and news of the sale and leaseback of eight distribution centers; restaurant earnings start this week with CAKE and CMG tonight; TUP rises on EPS beat and guidance
· Casino, Lodging & Leisure; gaming sector active after WYNN posted reported mixed 1Q results last night, with Las Vegas beating estimates, but Macau operations falling short; in leisure, SIX shares jumped as EPS and sales topped consensus
· Auto sector; PAG reported a top and bottom line beat; GT Q1 results topped views for EPS/revs and reaffirms 2018 segment op income, but analysts note; LAD soft results on the top and bottom line due to severe weather in the Northeast and unfavorable operating leverage; in research, FCAU downgraded to hold from buy as shares have benefitted from the turnaround and markets appear to be already pricing this in; VLKAY was upgraded to buy at Jefferies
· Inventory data was bearish for crude: the API reported that U.S. crude supplies rose 1.1M barrels for the week ended April 20, a decline of -2.7M barrels in gasoline stockpiles, while inventories of distillates fell by 1.9M; the EIA said today crude stockpiles rose 2,170M barrels vs. an estimate of -2.2M barrels, with Cushing crude +459k and gasoline a surprise build of 840K barrels
· Stock movers; HES gained after quarterly results while other big oil earnings this week include COP tomorrow and both CVX and XOM on Friday; CVE posted a much larger than expected Q1 loss, even as oil sands production nearly doubled to 359.6K bbl/day YoY
· Utilities; FirstEnergy Solutions, a unit of FE said it has informed the U.S. Nuclear Regulatory Commission of its decision to permanently deactivate its three nuclear power plants over the next three years; DTE Q1 operating EPS beat by 1c
· MLPS; PAA and PAGP both downgraded to hold at Jefferies noting stocks are up 20% and 16%, respectively, YTD and says the market is enthused about widening spreads, especially in West TX, but we believe the multiples are now rich
· Bank earnings; still constant flow of earnings in the mid-cap to small cap banks after large cap wrapped up last week on mostly better results (but cautious comments on environment); some movers on earnings today: BKU, CBU, FMBI (miss), NYCB (NIM miss), PB (EPS miss); in brokers, advisors and exchanges; EVR shares jumped on Q1 results topping views, driven by robust advisory and equity capital market fees; NDAQ and MKTX also reported earnings and TROW rises after EPS beat by 6c on better revs; cards and Services; COF weaker 1Q18 revenue estimates on slowing loan growth and NIM pressure from rising deposit beta, but credit positive; LC shares slumped on reports the FTC charged the lender with falsely promising consumers they would receive a loan with “no hidden fees,” when, in actuality they did
· REITs; BXP reported FFOPS of $1.49 below consensus estimate of $1.50; EQR posted a decent 1Q with SS revenues, expenses, and NOI all coming in ahead of views, thought NFFO missed by 1c on higher disposition activity; EQR Q1 FFO 1c below consensus as SS revenue grew 2.2% and SS expenses grew 3.9% resulting in 1.5% SSNOI growth for the quarter; HIW beat and raise quarterly results; LPT beat was primarily the results of lower operating expenses and higher earnings from the unconsolidated JV portfolio
· Biotech movers; AMGN reported beat and slight raise to the bottom end of guidance/double-digit growth from several recently launched products was “just offset” by the continuing decline of large legacy drugs. Said Leerink; BIIB was upgraded to outperform at Baird while Goldman Sachs removed it from its conviction buy list
· Managed care; HUM, WCG and CNC active after posting surprising wins in Florida Medicaid awards (MOH shares dipped on news); Leerink said WCG, HUM, CNC are the winners, AET gained modestly, UNH & ANTM performed largely in line, while MGLN and MOH failed to retain any contract in the long awaited FL Medicaid reprocurement awards; in earnings, ANTM rallies after quarterly results beat on better guidance
· Generic drug makers (MYL, TEVA, ENDP, MNK, PRGO) weak after a Bloomberg News report late Tuesday that U.S. prosecutors are nearing their first charges against companies in a nearly four-year-old criminal investigation into alleged price-fixing by generic-drug makers
· Hospitals; several analysts noted that hospitals (HCA, CYH, UHS, THC) received positive news overnight as the Centers for Medicare & Medicaid Services proposed 2019 Medicare hospital rates last night that were better than last year’s/CMS proposed a 1.75% rate for general hospitals to distribute ~$8.25B for unpaid care payments in fiscal 2019, an increase of $1.5B YoY
· Medical devices; EW shares dropped in reaction to disappointing THV (Transcatheter Heart Valve) sales relative to high expectations; ILMN raised both the top-line and EPS guide, as delivered a strong quarter with $782M in 1Q18 sales topping views (but beat was driven by Microarray and Services more than NovaSeq); other movers on earnings: BSX, IART
· Healthcare services; LH revenue and adj. EPS beat consensus expectations while FY18 revenue guidance was increased; WST downgraded at Bank America as believe that the company’s growth profile has become less attractive and the already significant premium to peers limits upside potential; healthcare REITS DOC, HR, HTA downgraded at Stifel
Industrials & Materials
· Aerospace & Defense; Dow component BA handily topped profit estimates and boosted the forecast for this year’s cash and earnings; defense stocks fail to rally, led by declines in NOC and GD after quarterly results (recall yesterday the sector failed to rally on LMT results, weighed down by fact they didn’t raise year after quarterly beat)
· Industrial & Machinery; CBI shares gained after Subsea 7 reaffirmed its offer for MDR without raising it, though it said it’s open to considering amending its proposal (overnight, ISS reiterated support for McDermott holders to vote for CBI deal); PCAR was downgraded by two analysts (Bank America and Baird) after earnings results yesterday; IR shares advanced on higher earnings; GE shares slumped after Moody’s revised its outlook on the company’s ratings to negative, meaning it could downgrade it in the medium term.
· Transports; in rails, NSC Q1 results beat as higher volumes, lower tax rate lifts quarterly profit; HTLF shares moved higher after Q1 EPS beat by 4c though revs fell short of views
Technology, Media & Telecom
· Internet; TWTR falls as Q1 revs of $665M beat and had active users 336M on better EPS and Ebitda, while Q2 rev guidance also above (said Q1 daily active users up 10% YoY vs. 12% in Q4); TZOO reported better Q1 earnings that topped views and saw sales growth in all three regions as well as increased membership; TRVG Q1 revs topped views, but its Q1 EBITDA loss of EU21.9M was worse than estimates; EBAY, FB, report tonight, AMZN Thursday 4/26; GRUB downgraded to neutral at Roth as believe elongated adverse 1Q weather could aid 1Q results, which they expect to be mostly in-line; GOOGL upgraded to buy at Stifel
· Semiconductors; Philly semi index (SOX) dragging the tech space lower, falling more than 1.5% earlier as breaks below its 200-day MA support of 1245 late yesterday and falls further this morning; TER shares drop after its 2Q EPS outlook well below views as misses the lowest estimate (guided Q2 EPS 45c-52c on revs $490M-$520M, well below the consensus of 93c/$693.91M; said it sees ‘sharp’ decline in demand for mobile device test equipment in 2018); TXN reported Q1 results solidly above estimates amid strength in auto and industrial markets ; SLAB reported better earnings, while MKSI also posted results
· Software & Hardware movers; AVT upgraded to buy at Bank America as the company has delivered on revenue recovery post vendor losses that hit topline last year, and is on track to show operating margin improvement; Digitimes article indicating AAPL component suppliers may not see pick up until mid-Q3 (HIMX, KN, SYNA); MRCY falls as Q3 revenue missed estimates and downgraded at Bank America saying share premium, compared to cash generative peers like CW, is unwarranted; CHKP shares dropped after results, as posted “only flattish billings growth” for 1Q, according to Cowen saying the results were consistently with mostly negative checks
· Optical sector; group pressured again after a Wall Street Journal report indicated that the Justice Department is looking into whether Chinese smartphone maker Huawei violated U.S. sanctions on Iran; shares of LITE, OCLR, NPTN, FNSR, ACIA among those weak https://on.wsj.com/2qYv5Yw . Recall recently the group was hit after the government banned U.S. companies from selling components to smartphone maker ZTE Corp.
· Media & Telecom movers; DIS was upgraded to outperform at BMO Capital; CMCSA made a 22 billion pound ($31 billion) offer for pay-TV group Sky (SKYB.L) on Wednesday, beating an already agreed takeover bid from Rupert Murdoch’s Fox (FOXA) by 16% https://reut.rs/2qZgrQR (CMCSA also posted strong quarterly results); QNST posted Q3 revs of $117.9M< topping $107.8M estimate and better guidance; VIAB posted better-than-expected results and said that its Paramount Pictures studio has returned to profitability; VZ upgraded by two analysts (UBS and SunTrust) after better quarterly results
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.