Mid-Morning Look: July 17, 2018

Terrie AmengualDaily Market Report

Mid-Morning Look

Tuesday, July 17, 2018

U.S. equities are mixed, bouncing off earlier lows. The Nasdaq Composite recovers from overnight weakness after quarterly rev/subscriber miss by NFLX/weaker outlook, sent shares down more than 14% before paring losses. Earnings volume starting to pick up with three Dow components (GS, JNJ, UNH) reporting results this morning. GS also reported a change in its CEO, to take effect in October. Economic data was mixed as Industrial Production data for June topped estimates, but was offset by a downward revision to the May data, which represented the largest monthly decline in manufacturing (-1.0%) in four years. Capacity utilization, meanwhile, was also lower than expected at 78%. Commodity prices under pressure again, with gold at 1-year lows and WTI crude extending its losses as the dollar rises firmly vs. counterparts. The dollar move comes as Fed Chairman Powell speaks in Washington.

In his semi-annual testimony on monetary policy and the economy before the Senate panel in Washington DC, Federal Reserve Chairman Jerome Powell said the central bank will continue to gradually raise interest rates “for now’’ to keep inflation near target amid a strong U.S. labor market. He said, “We are aware that, on the one hand, raising interest rates too slowly may lead to high inflation or financial market excesses,” Powell said in the text of his remarks Tuesday. “On the other hand, if we raise rates too rapidly, the economy could weaken and inflation could run persistently below our objective.’’

Treasuries, Currencies and Commodities

· In currency markets, the dollar with strong rebound today, trading above 112.90 vs. the yen (best levels since January), while the euro drops back below 1.17; the British pound abruptly dropped on reports that Theresa May could lose an important parliamentary vote on Brexit later on Tuesday, with GBP/USD down -0.55% at 1.3160, off earlier highs 1.3269. The dollar index (DXY) back near 94.80 level up about 0.3%

· Commodity prices: gold falling again amid the bounce in the dollar, trading to new 52-week lows for the precious metal drops below the $1,230 an ounce level and as Fed Chairman Powell paints a picture of steady interest rate hikes to head off inflation. Oil prices resume downward momentum, with WTI crude touching lows around $67 per barrel, lowest levels in over a month

· Treasury markets are little changed as the 10-year yield holds around 2.85% following mixed economic data and as markets digest the commentary from President Trump yesterday with Russia and as markets still weigh the concerns over trade issues with China, EU and others. Fed Chairman Powell speaking on monetary policy today in semi-annual testimony in Washington

Economic Data

· Industrial Production for June rose 0.6%, slightly topping the 0.5% estimate, and comes after falling -0.5% in May. May Industrial production was revised down to -0.5% from -0.1% in May. Capacity utilization rose to 78% from 77.7% in May, revised down from 77.9%

· U.S. Home Builders’ Confidence index (NAHB) in July holds at 68 vs 68 last month, according to NAHB/Wells Fargo. Present single family sales unchanged at 74 and Future single family sales falls to 73 vs 75 last month

Sector Movers Today

· Large Cap banks active on earnings and news; GS announced today David Solomon will replace Lloyd Blankfein as CEO starting October 1st and as Chairman at year end; GS also posted a $2.57B quarterly profit on $9.4B in revenue, exceeding estimates as earnings of $5.98 were above expectations of $4.66 and higher than a year ago (investment banking revs $2.05B, FICC sales & trading revenue $1.68B and equities sales & trading revenue $1.89B, below $1.97B estimate); CMA reported better-than-expected Q2 earnings driven by provisions (notes one analyst) as NIM improved but expenses missed, with credit driving most of the upside/CMA said set to meaningfully increase capital return; FHNQ2 EPS of 36c beat by 1c on NIM of 3.53%

· Industrial & Machinery; Machinery sector remains neutral at Goldman Sachs but removes DE and CAT from conviction buy list citing weaker crop prices, the risk of further input cost inflation, Japan’s NTN Corp. reported slowing bearing orders and. risk of further trade war escalation; also downgrades MTW and GNRC to sell. Also in machinery, Wells Fargo said absent a macro shock, earthmoving and power generation US dealer checks appear to suggest demand strength likely will continue into 2019, which is bullish for CAT, DE, and CMI

· REITs; PLD earnings in line pushes up year forecast for core FFO per share to $2.98-$3.02 from prior view of $2.95-$3.01 and now sees year-end occupancy of 97.0%-97.5% vs. previous forecast of 96.25%-97.25%. Stifel resumed coverage of the data-center sector with a positive view, saying the group is still in the early innings of growth and will keep moving higher amid strong demand (resumes buys on CONE, DLR, EQIX, INXN and QTS)

· Retail REITs were upgraded to neutral from cautious by Goldman Sachs saying the sector’s lower growth compared with other REITs is priced in, as there should be “fewer negative surprises” and the group is trading at a 21% discount to Goldman’s coverage (firm upgraded MAC to neutral and up tgt to $60) – says the outlook for same-store NOI growth is stabilizing, given fewer bankruptcies and big store closures (CBL, TCO other retail REITs)

· Restaurants; Raymond James said they maintained a selectively constructive stance towards restaurant universe ahead of what is generally expected to be a solid 2Q earnings season, as they upgrade BLMN to outperform but downgrade CHUY to Market Perform from Outperform on valuation and are also raising a few price targets (RUTH, TAST). Cowen upgraded QSR to outperform and raise tgt to $74 from $64 as believe Tim Hortons’ (TH) sales trends have bottomed, amid low 2018-19 consensus estimates and impactful upcoming drivers

       Stock GAINERS

· BF/B +2%; upgraded to outperform at Cowen saying the 15% pullback has priced in near term tariff risk providing attractive entry point for the leader in bourbon

· CDMO +26%; shares rally after earnings results beat

· IGT +4%; after announcing a sports betting pact with FanDuel at the Meadowlands Racetrack in East Rutherford, N.J.

· JNJ +3%; Q2 earnings and sales topped estimates while for the year, narrowed its profit outlook but cut its year sales view, partially offset by currency impact

· SCHW +4%; reported 2Q EPS of 60c, topping ests, driven by better than expected net interest revenue and well-controlled expenses. Core revenue increased 17% y/y, driven by higher net interest revenue and trading revenue, partially offset by lower asset management fees

· TRCO +4%; says to work with FCC to address concerns regarding SBGI merger


· CARB -4%; raised its Q2 EPS view to 41c-44c from prior 34c-38c (est. 36c) and raises Q2 GAAP revenue view to $77.3M-$78M from prior $75.8M-$77.8M but shares fell as also files to sell 4M shares, co-founder files to sell 520k shares

· GT -2%; downgraded to Sell at Goldman Sachs as see the tough backdrop in tires continuing (tire demand soft, raw materials higher, and pricing power that remains elusive

· HRL -2%; downgraded at Stephens on valuation and lower ests reflecting a higher expected tax rate & more moderate EPS outlook in Turkey

· NFLX -8%; after reporting weaker quarterly subscribers and guidance also fell short of consensus for revs and subs. NFLX 2Q total net subscriber additions 5.15M vs. Bloomberg estimate 6.27M

· OMC -6%; after missing 2Q revenue and operating profit estimates and reporting its worst organic growth in North America since the recession according to Goldman Sachs (organic revenue growth of 2% missed firms 2.5% est.)

· UNH -3%; after reporting a largely expected Q2 beat and a 2018 forecast boost that missed the highest end of analysts’ estimates, while Medical care ratio or medical loss ratio (MLR) of 81.9%, down 30 bps y/y, but was above some analyst estimates


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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