Monday, April 30, 2018
Equity Market Recap
· U.S. stocks end lower, pulling back near session lows late day and reversing earlier gains as investors prepare for a very busy week of market moving catalysts. Stocks started the day higher after four major M&A deals over the weekend (details below) lifted market sentiment. But, the Dow Industrials fell 300 points off its intraday higher, while the Nasdaq Composite fell more than -100 points off its best levels following a decline in shares of INTC and MSFT (each Dow component fell from all-time highs last week despite better earnings) and some biotech weakness (CELG). After today’s decline, all three major averages finished the month with gains less than 1%, thought the dollar posted its best month since November 2016. Treasury yields pulled back after touching 4-year highs above 3.03% last week for the benchmark 10-year. Oil prices rise as Israel’s Netanyahu accuses Iran of lying about nuclear program, while gold prices dipped on a stronger dollar, falling less than 1% for April. Investors brace themselves for a heavy week of corporate earnings (AAPL tomorrow night), as well as the FOMC policy decision on Wednesday (two-day meeting starts tomorrow), and potential tariff news this week. A rally in shares of Dow component MCD after stronger earnings and comp sales helped boost the index early, but failed given the slide in healthcare and tech stocks were too much. The Cboe Volatility index (VIX) rose on Monday, but posted its biggest monthly decline in more than a year, down 21% over the month of April, its biggest monthly decline since November 2016. Reminder that tonight most of European markets are closed for holiday.
· Personal Income for March rose 0.3%, slightly below the 0.4% expected rise, while personal spending rose 0.4%, in-line with estimates; real personal spending rose 0.4% vs. est. up 0.5%; core inflation rose 0.2%, matching estimate and rose 1.9% YoY; PCE prices unchanged, matching estimate and rose 2.0% YoY; the savings rate at 3.1% in March vs 3.3% the prior month
· Chicago Purchasing Managers index rises to 57.6 from 57.4 last month and was mostly in-line with the 58.0 estimates, but remains well below the 61.9 reading in February
· Pending Home Sales for March rise 0.4% MoM, missing the 0.7% estimate; sales in the Northeast fell (-5.6%) after Feb. rose 10.3%, while the Midwest up 2.4% (Feb. rose 0.7%), the South up 2.5% (Feb. rose 2.9%) and the West fell (-1.1%) vs. Feb. fell (-0.7%)
· Oil prices advanced 47c to settle at $68.57 per barrel (high $69.34 and low $67.17), rising in the afternoon after Israel’s Benjamin Netanyahu said he had proof of secret files from Iran’s nuclear program showing the project has all the components for nuclear weapons and the nation is “lying, big time.” Netanyahu referred to the nuclear deal as “terrible” and accused Iran of having a “secret nuclear bomb program.” Prices jumped back to fresh 3 ½ year highs after the commentary before paring its gains. For the month, oil posted its second monthly gain this year amid concerns over disruption of Iranian supplies and OPEC’s success in clearing a global crude glut, despite rising US shale and oil production. Gold prices settled lower by -$4.20 or 0.3% to settle at $1,319.20 an ounce, ending the month lower by 0.6% as the dollar index on track for its best month in more than a year.
· The U.S. dollar trades higher, adding to last week’s 1.5% gain (its best weekly performance since late November 2016), ahead of an expected hawkish FOMC policy meeting this Wednesday and as inflation expectations continue to rise. The dollar index (DXY) traded just shy of the 92 level (best levels since early January) as the euro slumped as low as 1.2064, just shy of last week lows of 1.2056 on Friday (has slid since recent ECB meeting). The Pound extends recent declines, back down at 2-month lows (as low as 1.3713) as markets rule out a rate hike at its upcoming policy meeting. Crypto currencies bounce further, with Bitcoin back above $9,300, while the safe haven yen pared losses later afternoon.
· Treasury prices rose as yields pulled back further from 4-year highs, now down roughly 10 bps from 3.03% level last week after inflation data was mostly in-line with expectations this morning (PCE data). Yields have been climbing amid signs of building inflation price pressures and rising rate hike expectations, but took a breather today ahead of the FOMCF meeting results on Wednesday afternoon. Investors will closely watch commentary from the FOMC regarding the pace of rate hikes and if they will adhere to three hikes in 2018 they initially suggested, or go with four rate hikes to head off inflation.
Sector News Breakdown
· Retailers; FRED shares fell as its CEO resigns amid shift to Pharmacy and Healthcare business; CRI named as a new beast idea “short” at Hedgeye; Wayfair (W) was downgraded to neutral at Wedbush ahead of earnings later this week; KORS touched 52-week high early in session as Buckingham initiated with buy and $84 tgt; earnings expected from TPR and UAA tomorrow
· Consumer Staples; after pressure from tobacco space on weaker guidance, MO upgraded to outperform at RBC Capital citing valuation saying fundamental and macro concerns (share losses for Marlboro, too much excitement over IQOS among investors, macro headwinds) are priced in; CL was downgraded to equal-weight at Morgan Stanley as deteriorating fundamentals raise questions about the company’s long-term growth and strategic potential
· Restaurants; Dow component MCD rises after reporting better than expected quarterly earnings and revenues, helped by its revamped new $1, $2, $3 menu as comp sales for US of 2.9% topped the 2.7% estimate while overall comps of 5.5% beat the 3.8% estimate
· Auto movers; in tire sector, CTB shares fell as reported weaker than expected Q1 sales, due to slow consumer sell-out within the industry that continued from 2017 (GT reported weak results last week as well); DAN Q1 EPS/revs beat estimates on mixed annual guidance
· Casino, Lodging & Leisure; in lodging/rentals, VAC agreed to acquire ILG in deal with implied equity value of about $4.7B as ILG holders to get $14.75 in cash and 0.165 in shares https://on.wsj.com/2HBlhyN ; IMAX said Marvel Studios’ ’Avengers: Infinity War’ opened with a $41.5M weekend global debut on 715 screens, excluding China
· Refiners; MPC to acquire ANDV in $35.6B deal; the deal includes a $600M termination fee; Andeavor shareholders can choose between 1.87 MPC shares or $152.27 in cash per share they own, representing a 24.4% premium to closing price https://on.mktw.net/2I5cO6w
· Oilfield services; Wells Fargo comments on space, after EPS reports more positive on WFT and PTEN, upgrade SPN to Outperform, downgrade OIS to Market Perform and see further downside EPS risk to RES – says believe that company commentary, 1Q results and guidance, and recent news flow remain supportive of our OFS investment thesis favoring NAM pressure pumping and completion services and potential upside surprises for subsea/production equipment orders
· E&P sector; Jefferies assumed coverage on four names: CLR, NFX, OAS, buy and XEC hold with preference skews towards those with oily exposure as we see potential for 2018 US oil growth to underwhelm vs. expectations (CLR added to Top Picks list)
· Oil drillers; ESV mentioned positively in Barron’s saying the oil-drilling firm is poised to rise as U.S. President Donald Trump is likely to reintroduce harsh sanctions on Iran. Each increase of 1% in the price of oil should result in a 0.85% increase in the stock, on average; DO reported Q1 EPS loss (16c)/$295.51M vs. est. loss (19c)/$295.14M
· Coal producers; ARLP after easily exceeding Q1 earnings expectations and raising its full-year revenue guidance above consensus; CNX also active after guiding Q1 revenue above consensus; AHGP also rises on earnings
· Top movers on news; WFC was upgraded to outperform citing likelihood of lower expenses; in insurance; MCY shares fell in insurance space as Q1 operating EPS came in well below consensus while CNA rises after quarterly results; in finance, FDC shares jumped following earnings results and raised its year guidance
· Asset managers/Alternative; FNGN signed a definitive agreement to be acquired by funds affiliated with Hellman & Friedman in an all-cash transaction valued at $3.02B, with holders receiving $45 per share in cash https://yhoo.it/2jmfTkF ; AMG Q1 earnings topped estimates, though included weaker-than-expected flows, with long-term net flows of -$1.9B; PJC was downgraded to market perform at KBW after weak Q1 results last week
· Warehouse REITs; busy day after PLD agreed to buy DCT for $8.4B including debt, w/DCT holders getting 1.02 PLD shares, valuing the deal at $67.91 per DCT share https://on.mktw.net/2JGkRns (shares of DRE, FRT also active on deal)
· Large Cap Pharma; AGN reports Linzess revenue that missed analysts’ estimates ($159M vs. est. $167M); STDY to be acquired by UTHR in a deal valued at $216M, including contingent payments, with holders getting $4.46 per share in cash https://on.mktw.net/2vYQ1Ey ; in managed care, CNC announced offering of $2.6B in shares while MOH reported mixed Q1 results on EPS beat and higher guidance but revs missed estimates
· Biotech movers; CELG slides after Morgan Stanley said that it may take the company over a year to refile its U.S. marketing application for multiple sclerosis med Ozanimod (note CELG reports earnings later in the week); KPTI shares fell ahead the company’s expected release of results from a Phase 2 clinical trial, STORM, assessing lead candidate selinexor in treatment-resistant multiple myeloma (MM), a Fast Track indication; PTLA stronger after Oppenheimer said that shares could trade to $50 in an upside scenario if its AndexXa gets receive FDA approval with a relatively unrestricted label on May 4th
Industrials & Materials
· Transports; airlines were mixed with ALK, DAL and AAL lower, while UAL outperformed; many of the rails have already reported as well as airlines, though CHRW reports tomorrow night in trucking sector; back to airlines, JPMorgan upgraded SAVE to overweight while they cut JBLU
· Metals & Mining; in steel sector, AKS Q1 EPS and sales topped consensus but again cautious comments on Q2 guidance sunk the sector early (recall sector fell last week on weaker X outlook/guidance); sector closely watching tariff news after Commerce Secretary Wilbur Ross said that the U.S. would extend relief from steel and aluminum tariffs to some, but not all, of the countries currently granted a reprieve that ends tomorrow
· Aerospace & Defense; MOG/A upgraded to buy at SunTrust citing the combination of improving FCF in FY19 (>120% conversion), lower aircraft R&D spending, and mgmt’s surprise divestiture of its struggling wind pitch control unit; ARNC shared fell -15%, among top decliners in the S&P after cutting its yearly forecast citing rising aluminum prices and business inefficiencies
Technology, Media & Telecom
· Internet; DIS and TWTR reached an agreement to create live content with advertising across the Disney portfolio on Twitter; TWTR confirmed Sunday that it sold data access to the Cambridge University academic who obtained Facebook user data; NFLX positive mention in Barron’s over the weekend saying it may soon surpass DIS in market value as investors cheer on the streaming service’s continued subscriber growth; AKAM to report earnings tonight after the close
· Semiconductors; AVGO narrowed the range for its Q2 adjusted revenue outlook to $5B plus or minus $25M from prior view $5B plus or minus $75M as for Q3 says expect continued strength in demand from datacenters while wireless remains weak; CRUS was upgraded to buy at Craig Hallum saying headwinds are already priced into the stock; ON results a penny better than expectations, with Q2 revenues above expectations and profitability in-line
· Software movers; busy earnings week ahead with APTI, SHOP, PAYC, ZEN, ULTI, ANSS, BNFT, PCTY, AKAM, VRNS, CVLT, QLYS, DATA, FTNT, NTCT, QTWO, RP and TDC reporting; Video gamers (ATVI, EA, TTWO) active ahead of quarterly earnings, with MKM saying the success of Fortnite doesn’t mean the sky is falling for the group (TTWO upgraded at Wedbush)
· Hardware movers; AAPL estimates continue to come down, with Oppenheimer the latest to cut estimates again to reflect a reduced iPhone shipment outlook and slightly higher R&D expense (note AAPL reports Tuesday after the close); FIT rises on news to use Google’s Cloud Healthcare API to integrate the company further into the healthcare system
· Telecom sector; Sprint (S) and TMUS agreed to combine in a $26.5 billion all-stock merger and believed they could win over skeptical regulators because the merger would create thousands of jobs; all-stock transaction is at a fixed exchange ratio of 0.10256 T-Mobile shares for each Sprint share, or the equivalent of 9.75 Sprint shares for each TMUS share https://yhoo.it/2jdGiku ; TU upgraded to overweight at Morgan Stanley driven by increased confidence in sustainable wireless growth, while firm downgraded COMM, cautious elevated EPS expectations to drive further upside are difficult on top-line beats alone
· Media movers; in advertising, WPP shares rise on earnings results as 1Q organic net sales decline was smaller than anticipated at (-0.1%), as China turned positive for the first time in five quarters; NYT was upgraded to overweight as believes digital demand will likely drive further outsized growth
· Tower stocks (AMT, CCI, SBAC) initially weak following merger as AMT notes that Sprint makes up 4% of property revenue and T-Mobile 3% of property revs – note the group did recover off lows as many analysts express concern deal carries significant regulatory risks (CCI, SBAC also bounce off lows)
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.