Tuesday, May 8, 2018
Equity Market Recap
· U.S. stocks spent most of the day lower, but closed off their worst levels, as President Trump said the U.S. will exit the Iran nuclear deal, breaking the previous accord signed in 2015. Trump said the U.S. will reimpose sanctions on Iran as well and warns any nations that aids Iran on nuclear weapons may also face sanctions. Trump has signaled his displeasure with the pact for a long-time so doesn’t come as a tremendous surprise, but markets were volatile the last few days heading into the news. Oil prices, which had pulled back from 4-year highs yesterday ahead of the announcement rebounded initially after the official news, only to reverse and end lower. Defense stocks (GD, LMT, RTN, NOC) also edged higher along with the rebound in energy stocks, while interest rate sensitive sectors such as utilities were among the day’s top underperformers. One sector that has performed well over the last few weeks remain small caps as the S&P SmallCap 600 and Russell 2000 have outperformed. The recent spike in the dollar (best levels since December) having no effect on small caps which aren’t as impacted as multi nationals amid a rising dollar. With the Iran news behind us, the FOMC decision last week and the bulk of quarterly earnings wrapping up this week, attention now turns back to trade/China. Coming into today, both the S&P and the NASDAQ had risen, while the Dow had gained three straight.
· WTI crude oil prices slumped on Tuesday, slipping -$1.67, or 2.4% to settle at $69.06 per barrel (though off the worst levels of the day of $67.63 per barrel – more than $ off yesterday’s closing high around $70.75). President Trump withdrew from the Iran nuclear accord, which could be seen as bullish for oil prices as it renews sanctions on the OPEC exporting country. For the time being, oil pulled back, as markets turn to weekly inventory tonight (API) and tomorrow (EIA).
· Precious metals slip for a 2nd straight session, though gold pares losses to settle lower by a mere 40c at $1,313.70 an ounce despite the US dollar extending recent gains (trades best levels since December). Gold prices bounced off lows late ahead of the announcement from President Donald Trump, on the fate of the Iran nuclear deal and its implications for crude-oil
Currencies & Bonds
· The dollar index (DXY) gained as much as 0.5% above 93.25 before paring gains, but still its best levels since late December. The euro falls near lows, dropping -0.6%, moving under 1.185 (also lowest since late December); greenback little hanged vs. the yen at, while the Pound falls below the 1.35 level, before paring its losses to end down slightly. Bitcoin prices fall a second session (cautious comments from Buffett and Bill Gates yesterday), down 2% above $9,200 (overnight highs $9,459). The dollar gained vs. emerging market currencies following the sharp decline in oil prices; dollar jumped near 1.30 level vs. the Canadian dollar, gained vs. Mexican peso as well.
· Treasury market’s dipped as yields moved higher, with the 10-year yield topping 2.97% this morning before ending around 2.96%, while the 2-yr moved above the 2.5% level. Yields higher after Fed Chairman Powell stuck by the central bank message of gradual tightening. The U.S. Treasury sold $31B in 3-year notes at a yield of 2.664% vs. the 2.663% pre-sale when issued, with a bid-to-cover (demand) at 2.76 vs. 2.85 in previous auction and indirect bidders awarded 45.6% of the auction and directs 12.3%
· U.S. job openings (JOLTs) rose to 6.55M in March from 6.078M prior month, the highest level since 2000; the March job opening rate (job openings as a % of total employment plus openings) 4.2% vs 3.9% prior month and March pace of hiring 3.7% vs 3.7% prior month
· May IBD/TIPP economic optimism index at 53.6 after April’s 52.6; Economic outlook rose to 51.3 vs 49.7 last month; Personal finance rose to 61 vs 60.7 last month; Federal policies rose to 48.5 vs 47.4 last month
Sector News Breakdown
· Retailers; NLS Q1 sales and Ebitda ahead of estimates after several recent downward guidance revisions (no change to guidance); in auto retail, AAP was upgraded at Atlantic Securities saying having seen Q1 performance at ORLY/GPC, we believe timing is compelling and expect an inflection in comp and margin trends at AAP; NKE mentioned negatively at Hedgeye saying expects downside of more than 25% (Bloomberg reports); CROX rises on earnings; FOSL released earnings early (was expected after the close) with a comp sales figure of up 5%
· Consumer Staples; HAIN posted a significant EPS and revs miss for Q1 (37c/$73.4M vs. est. 47c/$92.8M), sending shares lower; DF trades higher after Q1 profit topped expectations as its turnaround efforts gain traction; CORE shares drop more than 14% after Q2 FFO missed
· Housing & Building Products; building products stocks gain after MLM boosted its full-year Ebitda guidance and said it sees strong underlying building activity in public works (shares of VMC, SUM among others moving in sympathy); TREX climbs to record highs after Q1 earnings beat
· Casino, Lodging & Leisure; SEAS rises after earnings beat on smaller loss as attendance rebounded; RV stocks fell after CWH Q1 results as retail revenue growth of 21% was a deceleration from 4Q’s growth of 35% (shares of THO, WGO dropped)
· Energy sector pulls back after being market leader the past few days with WTI crude topping best levels since November 2014; group slid today with Iran news (above). In E&P sector; CLR downgraded to neutral at Citigroup on valuation noting shares are up >20% vs. a ~7% avg. gain by their E&P coverage group; REN Q1 EBITDA and 2Q oil miss; CRZO Q1 EBITDA beat as production, pricing, and unit costs all better than expected/Q2 guidance in line
· Refiners active on earnings results with ANDV beating but was downgraded at Morgan Stanley after MPC deal; DK Q1 net sales topped highest estimates and raised its dividend
· Utilities top sector decliner on rising rates; the Dow utilities (UTY) moved to afternoon lows, down more than 2.3% and trades below its 50 day MA support of 639.38, with all 20 components down 1% or more (top decliners AES, PCG, EIX, ETR, DTE)
· Large Cap banks; Citigroup (C) rose early on a report from The Wall Street Journal that activist investor ValueAct is building a stake in the bank; overall, banks benefitted on day from a bounce in Treasury yields (helping lending) and after Wall Street enforcer New York Attorney General Eric Schneiderman resigned hours after a report alleging he abused several women.
· Lending and Finance; MGI shares dropped as Q1 revs of $380M fell 2% YoY and 5% on a constant currency basis, as money transfer revenue of $336.6M fell 1% on a reported basis; COF announced selling $17B of mortgages to DLJ mortgage; ONDK a mover on earnings
· REITs; Bank America upgraded storage REIT EXR to buy and tgt to $105 on solid core growth prospects while firm upgraded CUBE to neutral and tgt to $32 saying its strong platform has helped it drive better than expected results. UBS noted since REIT earnings kicked off with Prologis on April 17, the RMZ index has outperformed the S&P 500 by 420 bps and 35% of our coverage universe has raised FFO guidance…also notes a wave of M&A (DCT/GPT) is helping the Industrial subsector growth
· Large Cap Pharma; AKCA shares dropped as FDA publishes staff report on its Volanesorsen ahead of May 10 meeting saying despite the magnitude of the effect seen on patients’ triglycerides, the volanesorsen review team remains uncertain whether the benefits of volanesorsen outweighs its risks, considering safety concerns (IONS active as company 75% holder of AKCA); Takeda Pharmaceutical agreed to buy SHPGY for $61.50B after raising the amount of cash in its offer to secure a recommendation https://reut.rs/2rrptXw ; LCI falls on Q3 results
· Specialty Pharma and generics outperform on earnings; VRX shares jump as raised year slightly and as its key gastrointestinal drug (Xifaxan) posted impressive growth at the start of the year, helping to offset declines in other parts of the business; ENDP another gainer after Q1 results top views (revenue of $701M tops $692M est.); MNK Q1 EPS and revs beat ($1.31/$572.6M vs. $1.08/$558.4M); PRGO mixed results as back year outlook
· Medical equipment and devices; TCMD shares rise as Q1 sales of $26.8M (+35.3%) came in $3.0M above consensus, driven by ongoing Flexitouch adoption and particularly strong traction in the VA; NVRO shares dropped more than 10%, falling after posting larger than expected quarterly loss on lower revs and downgraded at Wells Fargo
· Healthcare services and facilities; AMED Q1 EPS beat by 12c on higher sales; EVHC Q1 was stronger than expected and said it is making progress on its plan to realize $50M in savings during 2018 and to reach a $100M savings run rate by YE18; PINC reported solid results in its GPO business, but cut its EBITDA/EPS outlook based on weakness in Performance Services biz; ; BKD rises after 1Q results and 2018 guidance came as no surprise, given low Street expectations
Industrials & Materials
· Industrial & Machinery; CAT shares rebound after clarifying recent “high water mark” comment saying it is not meant to suggest markets peaking (helps industrials); MTW posted Q1 order strength and improving top line which boosts quarter and sentiment; in engineering space, JEC comes through with better quarterly results
· Aerospace & Defense; Goldman Sachs remains positive on the defense sector, as makes conviction list changes as earnings season information and share price volatility have reset valuation-versus-fundamentals comparisons/adds NOC to conviction list as sees industry’s best program portfolio, flags accretive capital deployment, strong metrics at OA; RTN was upgraded to outperform by Wolfe Research based on 1) valuation, 2) continued favorable outlook on the demand environment for defense and RTN products, and 3) RTN’s diverse and diffuse portfolio;
· Transports; overall sector outperformed on better EXPD earnings results, and as airlines gain; car rental space weak after HTZ Q1 YoY improvement was driven by strong volume growth in the U.S. and an expected reduction in fleet costs, but still came up short of consensus (shares of CAR dipped in reaction); LUV reported its April preliminary traffic statistics. The company flew 11.B revenue passenger miles, or RPMs, in April, a 0.3% decrease from the 11.2B RPMs flown in April 2017. Available seat miles, or ASMs, increased 1.5% to 13.6B in April; in truckers, UBS lowered tgts on a few names (KNX, WERN) says entering tug-of-war between EPS & PE’s
· Chemicals; NTR posts slightly weaker Q1 results on delayed Spring activity in North America due to colder temperatures; MOS posted a Q1 miss, but guidance raised on transformational initiatives at Mosaic Fertilizantes, which is expected to generate substantial earnings growth in 2H18; RKDA said results of a field trial of its “input traits” have significantly boosted the yields of rice crops
Technology, Media & Telecom
· Internet; ZG shares slipped early after reported 1Q results in line with expectations, with FY guidance unchanged; JD shares slipped after quarterly profit fell short of analyst expectations as they ramped up construction of physical shops amid BABA competition; SHOP announced new partnerships, adds Alipay, Wechat for payment methods; CRCM shares surge on strong results ahead of expectations for the top and bottom-line
· Optical sector active on earnings; OCLR Q3 EPS beat by 3c on better revs of $127.3M and margins 37.2% but notes temporarily suspends shipments/activities with ZTE due to sanctions; FN revenue topped estimates for Q3 ($332M vs. est. $319M) despite taking a hit from the ZTE sales ban (group bounced yesterday as well – AAOI, FNSR, LITE)
· Media movers; FOXA active after Reuters reported CMCSA is speaking to investment banks about obtaining bridge financing for an all-cash bid to displace DIS on its $52B deal to acquire most of FOXA assets https://reut.rs/2KHTx9v ; DISCA quarterly results better, sending shares higher; Dow component DIS reports after the close tonight; in movies theatre AMC Q1 EPS and revs topped views (group rallied yesterday after NCMI results)
· Telecom movers; DISH Q1 revenue just missed consensus estimates on in-line earnings and as pay-TV subs fell less than expected (shares fell 10%); ETM shares dropped over 20% after 1Q revenue missed analyst estimates due to soft local advertising conditions; other names in broadcasting GTN and TGNA also reported quarterly results
· Software movers; NOW slips after disappointing margin outlook commentary at analyst day as prior margin outlook of 28%-30% is being revised down for investment purposes; EVBG delivered another qtr of solid, organic results in Q1 with rev, EPS, and OCF ahead of expectations; PI shares rally after Q1 revenue tops estimates; forecasts Q2 revenue largely above estimates; CARB quarter came in ahead of expectations as biz bookings grew 14%, subscription bookings up 18%
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.