Thursday, May 3, 2018
Equity Market Recap
· It was another volatile day for major averages as the Dow Industrial Averages rebounded from a 400-point loss early in the session (23,531 low) t close higher and snap its 4-day losing streak, while the Nasdaq climbed over 100 points off its lows (6,991 low) as stocks bounced back ahead of the two-day meeting between the U.S. and China regarding trade and tariffs. Stocks sunk earlier in a quick flash, dragged down amid trade fears, weaker earnings results and rising rate hike expectations. However, both the S&P 500 and the Dow bounced back above the long-term, 200-day moving averages they breached earlier on hopes the meeting will produce a happy accord. Markets also await important economic data with the monthly nonfarm payroll report expected Friday morning. Inflation concerns and rising borrowing costs have spurred some profit taking in stocks the last few weeks, as Treasury prices have climbed along with a big bounce in the US dollar. Quarterly earnings thus far (nearly 400 of the 500 S&P components have reported thus far) have come in much better (partially helped by tax benefits, but fear of peak earnings (CAT comments last week), and margin concerns (amid rising costs) have spooked some sectors, causing companies to offer cautious outlooks. Pharma and services space lower on recent PFE miss, while CAH, ESRX, CERN soft guidance drops those names overnight. With today’s decline, the Dow traded to a 6-week lows before rebounding as markets await another busy night of corporate earnings.
· ISM-Non Manufacturing index for April falls to 56.8 from 58.8 in prior month and below est. of 58; business activity fell to 59.1 vs 60.6 prior month. Other breakdowns: new orders rose to 60.0 vs 59.5 MoM, employment fell to 53.6 vs 56.6 and prices paid rose to 61.8 vs 61.5
· Weekly Jobless Claims rose 2K to 211K, but was well below the 225K estimate while prior week claims unrevised at 209K; continuing claims fell 77K to 1.756M in the week ending April 21; the 4-week moving average decreased by 7,750 to 221,500 – lowest level since March 1973.
· Nonfarm productivity for Q1-P rose 0.7%, slightly below the 0.9% estimate while output (goods and services produced) increased 2.8%; hours worked rose 2.1%. Unit labor costs climbed by 2.7%, below the 3% estimate. The overall trend in labor costs is more muted, however. Unit-labor costs have risen a paltry 1.1% in the past four quarters.
· U.S. trade deficit fell (-15%) in March to (-$49.0B) vs. est. (-$50B) to the lowest level in six months, after March was (-$57.7B); Exports advanced 2% to $208.5 billion and set a new record, while U.S. imports dropped 1.8% to $257.5 billion
· Markit said April Composite PMI 54.9 vs. Flash Reading 54.8 and rises from 54.2 in March and a year ago 53.2; new orders rise to 58.5 vs 56.9 in March
· Factory Goods Orders for March rise 1.6%, topping the 1.4% estimate while orders for February revised up to 1.6%; orders up seven of last eight months; new orders ex-trans. for March rise 0.3% and new orders ex-defense for March rise 1.6% after rising 1.3% in Feb.
· The 30-year fixed mortgage rate for week ended today fell to 4.55% from 4.58%, Freddie Mac said; the 15-year rate avg 4.03%, up from 4.02% a week earlier.
· Energy futures rebounded off earlier lows, buoyed by potential supply risks, though upside has been capped by rising U.S. inventories while President Donald Trump neared a decision on whether to reimpose sanctions on Iran. WTI crude settled at $68.47 per barrel, rising 54c while Brent rose 33c to $73.69 per barrel. Trump’s deadline to decide on Iran is just over a week away, and could hit the OPEC nation’s crude exports. Overall, oil prices dealt with rising supplies after bearish inventory data yesterday, but recent reports the IMF may expel Venezuela from international coalition of nations supported prices.
· Gold prices end higher, rising for the first time in the last four sessions, as investors rotated into defensive assets early on as stocks plunged. Gold pared gains as stocks rallied off the lows, turning positive mid-session but not before gold prices advanced $7.10 or 0.5% to settle at $1,312.70 an ounce
· Treasury prices gained/yields fall, as the benchmark 10-yr slipping about 3 bps to 2.94% (traded below 2.93%) as investors rotated out of stocks and back into bonds. Softer inflation data out of the UK sent the Pound lower and dollar higher, which also came a day after the Federal Reserve left interest rates unchanged, as expected but noted inflation has risen. The 10-year Treasury note yield fell 2 bps to 2.945%, while the 2-year note yield fell around 2 bps to 2.48%. Treasury yields were pushed lower by falling EuroZone bond yields. Eurozone inflation grew at an annual pace of 1.2% in April, Eurostat said, slightly lower from a reading of 1.3% in the previous month.
Sector News Breakdown
· Consumer Staples; KHC quarterly results and commentary around the 2H’18 provided relief from the string of earnings disappointments in the consumer staples sector; in grocers, SFM falls after 1Q comp sales missed estimates and the company cut its full year sales forecast; EL was upgraded to buy at Deutsche but downgraded to hold at Jefferies after earnings; K shares rise after earnings beat expectations, outlook raised; lots of other earnings related movers including AVP in cosmetics, THS and POST in food, and CHD in products
· Auto movers; TSLA shares fall more of a results of the “odd” conference call by CEO Musk who dismissed analyst questions and cut come off mid-question (according to analysts) rather than its earnings results; in auto parts, ADNT drops more than 10% as Q2 EPS missed
· Restaurants; PZZA shares fall after Stifel said they believe domestic SRS have declined 5-6% YTD with 2QTD SRS performing worse than our -4.5% estimate for 1Q; HABT downgraded at Stephens as sees limited visibility following the company’s Q1 results/notes slower traffic
· Housing & Building Products; in building products, VMC Q1 EPS handily top consensus by 21c on better revenue, only reaffirms year; homebuilder BZH Q2 results top estimates, helping the homebuilding sector (TOL, LEN, MTH)
· Education sector gets another good round of earnings, as shares of LOPE and CECO both react favorably to earnings results; yesterday, it was CPLA and STRA lifting the group on results
· Casino, Lodging & Leisure; in gaming, MLCO mixed Q1 as earnings beat but revenue of $1.31B misses estimates; SGMS results came in mixed as CEO surprise departure weighs on shares; CZR Q1 results beat with lower marketing cost and reaffirmed RevPAR strength in Vegas; in leisure, MBUU downgraded at Wells Fargo, but only on valuation. Lodging space busy after earnings: HST reported better-than-expected 1Q EBITDA of $370M vs. est. $353M, driven by RevPAR growth of 1.7%; Hyatt (H) rises n Q1 EPS beat though revs missed slightly; HGV Q1 EPS/revs/Ebitda miss views and guides year below estimates; XHR and VAC also movers on earnings in lodging space
· Energy sector active on earnings, especially in the E&P sector where most names slide on results; President Trump decision on Iran also remains a driving force for oil prices; Non E&P movers; TUSK falls on earnings miss in equipment sector; in coal, HCC rises on quarterly beat and boosted guidance; PCG shares dropped in utility space after 13c EPS miss while passed on providing a 2018 earnings forecast, saying there’s too much uncertainty over its liability for deadly wildfires that hit Northern California wine country last fall
· E&P sector mostly weaker after earnings; MRO bright spot as posted 6% oil beat and full-year guidance raise, including upside 2Q18 oil guide; on flip side, APA falls as boosted 2018 production guidance is positive, but investors negative view on nat gas prices will overshadow a solid 1Q; LPI falls on downgrade and results and contract dispute with RDSA; AREX misses on realizations, unit costs; CLR falls as Q1 oil volumes missed by -2% and management said total production would have been 5 Mboepd higher without nasty weather; MTDR nice production beat, strong well results; PXD Permian production at the top end of the Q1 guidance range (260 Mboepd actual vs. 252-260 Mboepd guidance) and management suggesting that PXD is trending toward the upper end of its FY18 Permian production growth target of +19%-24%
· Banks were among the day’s top underperformers as yields dropped across the board, though insurance names active amid earnings results; AIG the big drag on the group as missed Q1 EPS by 23c as P&C underwriting loss was greater due to underlying underwriting margin weakness, LNC slightly lower earnings result in the Annuities segment (the largest) were offset by better earnings results in Other and Group; MET posted small EPS beat, driven by favorable underwriting, volume growth, and the effects of tax reform; PRU falls on mostly in-line EPS results; AHL, XL, also out with earnings; KKR rises as beats earnings expectations and announces plans to convert to corporation
· Payment and services; SQ posted a broad-based beat across nearly every metric (upgraded to buy at Stifel) as GPV growth of 31% y/y to $17.8B exceeded ests and raised its 2018 adj. revenue guidance 8% at the mid-point
· REITs: CONE delivered robust leasing volume in 1Q18, with $40M of bookings marking the highest level of production since 2Q16.Q1 FFO also beat while affirmed year; ESS occupancy gains contributed to better than expected 1Q18 results on both top-line growth and core FFO; LSI reported a 1Q beat, and management raised the FFO guidance midpoint 0.3%, as growth stabilized; MAA FFO was in line with consensus on a “clean” basis; in real estate services, RLGY falls as guidance came in slightly weaker
· Pharma movers; MRK said Phase 3 KEYNOTE-407 trial investigating KEYTRUDA combination with carboplatin-paclitaxel or nab-paclitaxel as first line treatment for metastatic squamous non-small cell lung cancer met a pre-specified secondary endpoint; in generics, TEVA boosted its year outlook amid cost cutting initiatives from new CEO; EXEL jumps on better Q1 results; AKAO falls after split vote from FDA panel on antibiotic plazomicin; specialty pharma and large cap remain under pressure ahead of President Trump speech on drug pricing next Tuesday; Akorn AG, a unit of AKRX, got three observations from the FDA from an inspection between 12/4-12/12
· Biotech movers; REGN tops estimates on stronger sales of flagship eye drug Eylea – shares opened higher before slipping to fresh 52-week lows; CELG the big name this week, reporting earnings tomorrow morning; other movers on earnings BLUE,
· Healthcare services; CERN falls as lowers 2018 adjusted EPS outlook to $2.45-$2.55 from $2.57-$2.73 to reflect the delay of a large contract and a less predictable end market; ESRX slips after cutting its year outlook to reflect the suspension of its repurchase program pursuant to co.’s merger with CI; CAH plunges after its CEO said FY19 will be “more challenging” than anticipated shortly after the company cut its 2018 outlook (a day after ABC led group higher); ICLR strong 1Q18 results, including 21% growth in gross bookings and slightly raised year view (shares of supply chain MCK, OMI, DPLO, ABC, HSCI fall on the CAH, ESRX guidance); BDX weak on margins
· Medical devices and equipment; HOLX shares fell after cutting FY18 adjusted revenue view to $3.18B-$3.21B from $3.2B-$3.28B vs. est. $3.25B; GMED shares fall despite solid revenue beat and boosted guidance; IRTC also a beat and raise quarter but investors reward shares; MASI with 6c EPS beat and better revs; DXCM surges as reported a very strong Q1 result topping consensus revenue of $172M by about $12M and raised guidance from a midpoint of $840M to $855M; in ortho, SNN shares lower on weaker Q1; OSUR falls on earnings miss and lower guide
· IPOs and secondaries: INSP 6.75M share IPO priced at $16.00; UBX 5M share IPO priced at $17.00; QURE 4.5M share Secondary priced at $28.50; KPTI 9.152M share Secondary priced at $14.75; MEDP 3M share Spot Secondary priced at $35.75
Industrials & Materials
· Heavy duty truckers; group tries to recover after yesterday sell off in CMI and PCAR on analyst downgrades (CMI 52-week lows); overnight, preliminary Class 8 truck orders for April were 34,800 units, up 45% y/y, according to data from ACT Research, which compared to the 36K-39K estimate from Wells Fargo (CMI, PCAR, NAV, ASLN leveraged to the data)
· Machinery & Industrial movers; Bank America with a few changes in space as they upgraded DE to buy saying shares have materially underperformed the sector over the last two months on Chinese trade war concerns and increasing input costs, while the firm downgraded CMI and CAT noting machinery stocks highly correlated to ISM data which had dipped the last 3-month; PNR was downgraded at RBC Capital saying the breakup catalyst is now complete
· Waste services; sector higher on earnings as ADSW advances on 4c EPS beat with higher revs as reaffirms Ebitda guidance; RSG beat 1Q and reaffirmed its guidance; CLH was upgraded at Baird after rising yesterday as beat 1Q18 sales/adj. EBITDA/adj. EPS consensus estimates; WCN top/bottom-line consensus estimates on strength in solid waste/E&P and indicated upside to prior FY18 adj. FCF; SRCL reports earnings tonight
· Transports; index lower falling over 1.5% led by CAR after earnings results down 9%…also 2% declines for DAL, NSC and CSX; CAR headline sales, Ebitda and EPS were all well ahead of expectations, but didn’t raise full-year 2018 guidance; XPO jumps on better earnings
· Chemicals; DWDP erased early gains, falling as much as 2.5% despite increased production and higher resin prices helped drive a 23% increase in Q1 earnings and guided Q2 revs above views – though did say sees 1H sales down low-single digits percent, with operating Ebitda expected to fall mid-single digits percent; FMC higher after earnings results
Technology, Media & Telecom
· Internet; SPOT Q1 in line with the company’s guidance and left full-year guidance unchanged as peer Pandora (P) reports tonight after the close; SNAP extends its earnings related losses, falling further to fresh all-time lows
· Semiconductors; CRUS missed Q4 revs and guided Q1 revs $210M-$250M below est. $305.95M due to lower than anticipated smartphone unit volumes; QRVO Q4 top/bottom line beat but Q1 guidance fell short of estimates which reflects near-term impacts of product mix and costs associated with lower utilization at their SAW filter fabs; NXPI Q1 revs missed while gross margins also below consensus and no forward guidance was provided; NVDA upgraded to overweight at Barclays and tgt to $280 as see a strong gaming/Volta cycle ahead, which should help mitigate any near-term crypto risks, while our work suggest the AI franchise is more durable in the Data Center with some Edge opportunities; SWKS reports tonight after the close
· Software movers; in security, FEYE reported good Q1 results across the board and gave Q2 and FY guidance above consensus, but shares fell; CRM upgraded to Market-Perform at Bernstein because they believe it has created a path to >20% revenue growth for next two years; DATA reported revenue results that printed modestly above consensus while profitability was in-line/license revenue of $106M was 11% ahead of consensus
· Hardware movers; IBM traded near 52-week lows as stocks dropped sharply early morning before rallying off lows; LOGI shares outperformed on earnings and guidance results
· 3D stocks; group was pressured yesterday after SSYS weaker quarterly results; overnight, DDD posted a moderate 1Q revenue beat and an EPS miss
· Networking and equipment; JPMorgan initiated sector with CIEN the top pick based on its leverage to a multi-year investment cycle, while also positive on CSCO and FFIV; EMKR reported a 2Q loss that missed all estimates as customer inventory adjustments led to an order shortfall
· Gainers on earnings: DATA, NSIT, QTWO, RTEK, TTMI, WK
· Decliners on earnings: DDD, FEYE, FIT, MANT, SPOT
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.