Market Review: May 14, 2018

Terrie AmengualDaily Market Report

Closing Recap
Monday, May 14, 2018

Equity Market Recap
· U.S. stocks finished higher but suffered an afternoon pullback, with the S&P 500 turning negative briefly amid a decline in interest rate sensitive stocks. However, stocks held on despite the yield on the 10-year Treasury bond ending around the 3% level, led higher by reduced inflation fears (after softer CPI last week), and improved trade negotiations by President Trump and Chinese leader Jinping this weekend. The surprise good news on trade talks with China lifted semiconductors (NXPI, QCOM, and MRVL) and optical stocks (ACIA, LITE, OCLR). The U.S. dollar snapped its 4-day losing streak, advancing late session while energy shares advanced as WTI crude futures settled above $71. Earnings season is mostly behind us (though Dow component HD with results tomorrow morning and LOW reports later this week), and the FOMC policy meeting wrapped up recently, leaving trade as the next likely catalyst for major US averages in the near-term. There are several Fed speakers that could shake-up markets this week, but China/US headlines as well as updates on the NAFTA agreement will be closely watched. The Dow Industrials managed to run its winning streak to 8-consecutive days, while the Russell 2000 traded to an intraday record high.

· Oil prices close higher, with WTI crude rising 26c or 0.4% to settle at $71.26 per barrel, while Brent outperforms up over $1 at $78.23 per barrel, with both trading at best levels in over 4-years. Prices remain higher after bullish inventory data last week (larger than expected stockpile declines) and fears of reduced supply with the U.S. sanctions on Iran. Earlier today, the EIA reported crude-oil production from seven major U.S. shale plays is expected to see a climb of 144,000 barrels a day in June to 7.178 million barrels a day.
· Gold prices dipped, with June gold falling -$2.50 to settle at $1,318.20 an ounce, pulling back despite the dollar falling for a 4th straight session. Gold prices have actually slumped five of the last six sessions even in the face of a dollar drop. Gold futures have now held below Thursday’s settlement at $1,322.30, which marked a recent peak, the highest finish since late April 27. Gold futures logged a roughly 0.5% rise last week, first weekly climb in a month.

Currencies & Bonds
· The U.S. dollar erased early losses, with the dollar index (DXY) recovering off lows of 92.24 to trade above 92.60 late afternoon, snapping its 3-day losing streak. The euro traded to afternoon and intraday lows, erasing earlier gains moving down at 1.1939 (off highs 1.996), but still off lows last week of 1.1823 on 5/9. The dollar has pared recent gains following the tamer inflation readings (CPI and PPI) late last week, but got a little bounce late day, strong gains vs. the yen.
· Treasury markets end lower as yields rose slightly, with the 10-yr yield back near 3% ahead of a very busy week of Federal Reserve official speeches that could offer clues as to how the recent run of soft inflation data could alter the central bank’s rate hike trajectory. The 10-year Treasury note yield added 2 basis points to 2.99% while the 2-yr yield traded near 2.54%.

Sector News Breakdown
· Retailers; LB upgraded to buy at Citigroup saying it’s not an “all’s clear” type of call noting things may get worse before they get better. But says the market has become so bearish on LB that the valuation is just too cheap to ignore; PLCE upgraded to Outperform at Oppenheimer and raise PT to $150 noting it has underperformed YTD (-11%, our universe +8%) and is trading at ~14x-15x, 2-3x compression vs. ’17; SHLD announces initiation of formal process to explore potential sale of assets; TLRD upgraded to buy at Jefferies and raised tgt to $40
· Consumer Staples; few research calls as DF was downgraded to sell at Deutsche Bank with $9 tgt; IFF was downgraded to neutral at JP Morgan; TWNK was downgraded to hold at Deutsche Bank; in restaurants; CMG tgt raised to $530 at Piper as think +2% range as suggested by checks is enough for the stock to continue to work; EPC and PG shares active after Stifel noted recently found COST selling Kirkland Signature triple blade razors a new, first-time product offering at Costco and likely to increase competition in an already competitive U.S. wet shave category
· Housing & Building Products; in building products space, Wells Fargo upgraded MAS to outperform and downgraded OC to market perform, while reiterate Outperforms on builders DHI, LEN, TOL and KBH. Also, Bank America downgraded FBHS, MAS and JELD to neutral and upgraded builder MTH to buy as they have become more selective within the building products group given: 1) secular themes identified within the primer, 2) input cost headwinds, and 3) company specific challenges, but increased confidence in the homebuilding cycle
· Gaming sector (WYNN, LVS, MGM, BYD, PENN SGMS) active as the U.S. Supreme Court ruled in favor of the state of New Jersey in a case that could open sports betting around the nation. In a 6-to-3 vote, the Supreme Court in Murphy vs. National Collegiate Athletic Association ruled the Professional and Amateur Sports Protection Act doesn’t make sports gambling a federal crime. New Jersey has sought to legalize sports gambling in Atlantic City and at horseracing tracks.
· Auto sector; Following news that Tesla’s (TSLA) engineering chief was taking a leave of absence and that a senior executive was departing the company for Alphabet’s (GOOGL) Waymo division, Tesla CEO Elon Musk told employees in an internal memo that the company was undertaking a restructuring to flatten its management structure, the WSJ reported. MGA shares were upgraded to outperform at BMO Capital and raised its target to $75

· Top stories; COP has moved to take control of PdVSA facilities in the Caribbean after winning a $2 billion legal judgment tied to Venezuela’s seizure of its assets in 2007; Bloomberg reported BHGE is in talks with Abu Dhabi National Oil Co. to set up a partnership that could lead to the U.S. firm taking a minority stake in the state-owned energy giant’s drilling unit; OII was upgraded to buy at Goldman Sachs saying we are in the early stages of an offshore cycle unfolding, and with the deepwater leveraged equipment and service provider OII’s share price hovering close to its historical lows, they upgrade; NINE rises after Q1 revenue beat
· Solar industry active again; the industry got a boost late last week after California requiring homebuilders to install solar panels on nearly all new residential buildings. Barron’s noted this weekend the news should boost shares of RUN and VSLR according to Guggenheim’s analyst.
· MLP index; the Alerian MLP Index advanced after closing last week up 2.0% (the AMZ), roughly in line with the S&P 500 up 2.4%, but lagging the broader XLE energy index (up 3.9%) in what was a supportive commodity price environment. Crude and natural gas prices rallied 1.2% and 3.8%, respectively, following President Trump’s decision to abandon the Iran deal.

· Banking & Insurance news; CADE agreed to buy STBZ in an all-stock deal valued at about $1.4 billion; State Bank shareholders will receive 1.160 shares of Cadence class A common stock for each State Bank share ; FNHC upgraded to strong buy at Raymond James as expect consolidated results to improve significantly
· Brokers; SCHW says total client assets $3.31 trillion at end of April and new brokerage accounts totaled 141,000 in April, up 13% from year earlier; ETFC Daily Average Revenue Trades for April of 249,939 increased 28% YoY/added 188,056 gross new brokerage accounts and ended April with about 3.9m, up 155,634 vs March

· President Trump and HHS Secretary Alex Azar laid out a blueprint to help address rising drug prices in the United States. PRGO said late Friday it expects to receive a Complete Response Letter (CRL) related to its marketing application seeking approval for a generic version of TEVA’s asthma med ProAir (albuterol sulfate) Inhalation Aerosol; GALT proceeds to Phase III development of GR-MD-02 for NASH Cirrhosis following FDA meeting
· Medical devices & Equipment; MYO shares active after announced that the U.S. Centers for Medicare & Medicaid Services (CMS) has made a preliminary decision establishing reimbursement for its MyoPro powered brace; BSX negative CBS 60-Minutes report last night claiming that the mesh products contain counterfeited and smuggled products; TNDM upgraded to overweight at Piper citing better clarity into the upgrade/renewal cycle in front of the company and believe they are about to enter a “Goldilocks Period”

Industrials & Materials
· Transports; in rails, Goldman Sachs upgraded CSX to neutral from sell while downgraded CNI to neutral saying rail multiples aren’t reflecting a shifting business mix, which warrants consideration in the current growth environment; Transports underperform major averages, led by declines in KSU, ALK, CHRW, UNP while UPS rises on bank America upgrade
· Aerospace & Defense; broad weakness in defense stocks (LMT, NOC, LLL, RTN) with Bernstein noting that defense stocks fell by more than 10% after Q1 earnings, even though earnings reports were in line at worst. The end of US support for the Iran nuclear deal led to a modest recovery last week. They said they see the reality of recent defense stock declines as driven by record high relative valuations, not adequately supported by growth
· Chemicals; FMC was upgraded to buy at Goldman Sachs citing solid Q1 results, saying still not too late to own despite rallying ~22% off the late March bottom (vs. S&P500 +5%); WSJ reported midday that the US and China are closing in on a deal that would give China’s ZTE Corp. a reprieve from potentially crippling U.S. sanctions in exchange for Beijing removing tariffs on billions of dollars of U.S. agricultural products

Technology, Media & Telecom
· Optical stocks (ACIA, AAOI, LITE, OCLR) among the day’s top performers after President Donald Trump tweeted this weekend that he was working with China to find Chinese smartphone maker ZTE Corp. a way to get back into business, fast. The comments come after Trump’s administration blocked U.S. companies from selling to ZTE for seven years, alleging that ZTE failed to reprimand employees after violating Iran sanctions
· Semiconductors; NXPI and QCOM shares rally after trade tensions eased between the U.S. and China, as Chinese regulators have restarted their review of QCOM’s application to acquire NXPI following the reports that President Trump and Xi Jinping are working together to help trade; Bank America noted shares of chip suppliers SWKS, QRVO and equipment vendors IDTI, XLNX, AVGO, MRVL may benefit after President Trump stepped into rescue ZTE; AOSL shares fall to near 2-year lows after Stifel downgraded to hold
· Media movers; VIAB shares fell after CBS announced that it has filed a lawsuit in Delaware Court of Chancery alleging breaches of fiduciary duty by National Amusements, the parent of both companies which is pushing for a merger of the two; MSG shares little bounce after Mark Cuban said in CNBC interview that sports teams market values may double with the Supreme Court ruling today passing legal betting; advertising names such as CRTO, QNST, TTD were volatile after AMZN is taking its most assertive step yet into the digital-advertising market by testing a new display ad offering that threatens multibillion-dollar revenue streams at GOOGL
· Software & Hardware movers; CRM disclosed it bought that it bought 4.9M shares of DBX in Q1, which represents about 1.3% of the shares outstanding; SYMC rebounding after Friday -33% decline on lower guidance and information about an internal investigation announced last week; XRX shares fall (downgraded at JPMorgan) after company said it will back out of its merger deal with Fujifilm Holdings Corp. as it reached a new settlement with two of its biggest shareholders. Xerox said it reached a settlement to replace its chief executive and overhaul its board

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.

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