Market Review: January 16, 2019

Scott GreenDaily Market Report

Closing Recap

Wednesday, January 16, 19

Index

Up/Down

%

Last

DJ Industrials

141.57

0.59%

24,207

S&P 500

5.76

0.22%

2,616

Nasdaq

10.86

0.15%

7,034

Russell 2000

9.42

0.65%

1,454


 

Equity Market Recap

·     U.S. stocks were in rally mode Wednesday, as today’s gains were led by a surge in financials/banks as investors applauded strong quarterly results from Goldman, Bank America, and a handful of regional banks that pushed the sector higher. Yesterday’s rally was fueled by tech which advanced today as well, but underperformed the S&P and Dow. Risk sentiment appeared to improve as the yen weakened and Treasury prices slipped sending yields higher. UK Prime Minister Theresa May won a much-anticipated confidence vote this afternoon, as the British Pound modestly advanced. Transports also moved higher following better results from airline UAL and ahead of rail CSX earnings tonight. The partial US government shutdown rolled into its 26th day with both sides still nowhere near a compromise. Major averages move to fresh 1-month highs after all topping key psychologically levels (2,600 for the S&P, 24,000 for the Dow and 7,000 for the NASDAQ) for the first time in a month yesterday and extended gains today. Outside of Financials, Energy, Healthcare and Tech helped round out the gainers.

·     Fed Beige Book showed: Economic activity increased in most of the U.S., with eight of twelve Federal Reserve districts reporting modest to moderate growth. Outlooks generally remained positive, but many districts reported that contacts had become less optimistic in response to increased financial market volatility, rising short-term interest rates, falling energy prices, and elevated trade and political uncertainty. Reports often cited rising materials and freight prices as sources of cost increases, and a number of districts said that higher tariffs were also a factor.

Economic Data

·     Import Prices for December fell (-1%) MoM vs. est. down (-1.3%) after falling (-1.9%) in November; Import prices fell 0.6% y/y in December; import prices ex-fuels unchanged after falling 0.3% in November; Export prices fell (-0.6%) after falling (-0.8%) in Nov.

·     Monthly Retail Sales and Business Inventories data postponed due to gov’t shutdown

·     U.S. Home Builders’ Confidence index (NAHB) in January rises to 58 vs 56 last month; present single family sales rise to 63 vs 61 last month; future single family sales rise to 64 vs 61 last month; prospective buyers traffic rises to 44 vs 43 last month

 

Commodities

·     WTI crude oil finished higher by 20c or 0.4%, to settle at $52.31 per barrel, bouncing late day to finish with a modest gain after mixed weekly inventory data earlier. WTI crude touched highs of $52.52 earlier and bounced off lows of $51.26. The EIA posted a slightly bigger than expected draw for crude oil this week, but gasoline and distillate data came in bearish. Gold prices rise $5.40 or 0.4% to settle at $1,293.80 an ounce, rising again but failing to top $1,300.

 

Currencies & Treasuries

·     Treasury market’s slide as yields bounce off recent monthly lows as the 10-yr up around 3 bps at 2.74% and 30-yr near 3.10% (1 month highs); shorter-term 2-yr 2.545%, 3-yr 2.53% and 5-yr 2.547%. Bonds saw a pullback after its recent spike as investors rotate back into riskier assets with major averages pushing higher over the last 2-weeks. The U.S. dollar traded in a tight range most of the trading session vs. rivals, with the euro holding around 1.14 and the dollar moved back above the 109 level vs. the Japanese yen. The British Pound rises slightly to 1.2887 after volatility yesterday following the rejection of UK PM May’s Brexit plan by Parliament.

 

 

Macro

Up/Down

Last

WTI Crude

0.20

52.31

Brent

0.68

61.32

Gold

5.40

1,293.80

EUR/USD

-0.0014

1.1399

JPY/USD

0.40

109.09

10-Year Note

0.023

2.731%

 

 

Sector News Breakdown

Consumer

·     Retailers; JWN shares fell as reported Holiday sales post close saying FY EPS is tracking toward the low-end of plan and is no longer going to meet its target of operating margins inflecting higher this year; the commentary follows recent weak results/guidance from Macy’s (M), KSS last week that weighed on retail

·     Consumer Staples; SYY downgraded to neutral from buy at Bank America and cut tgt to $68 from $75 citing a weaker growth outlook and expectations for margin headwinds; GIS was added to Citigroup US focus list; CMG tgt raised to $485 at Cowen today as get the sense the near-term trends remain on track while mgmt shared an upbeat and charismatic vision to ultimately return to 2.5 million AUVs (Piper reiterated OW and $550 tgt – after appearance at ICR conference); UNFI provided long-term view guidance today in a filing of $27B-$27.5B in sales for 2022

·     Housing & Building Products; Jefferies the latest to cut estimates on building products (MAS, FBHS) to reflect roughly flat starts in ’19, but expect starts to reaccelerate in 2H19 as consumers digest current rates/home prices/also downgraded IBP to hold; ENR 4.1M share Secondary priced at $46.00; homebuilders were mostly lower (LEN, KBH, PHM); US applications for home loans continue to rebound, hitting an 11-month high last week as a pullback in mortgage rates fueled a sharp increase in purchasing activity

·     Casino & Leisure movers; WYNN positive mention at Stifel (raise tgt to $141) as continue to see a compelling long-term case to own shares based on diminished headline risks, continued Macau share gains, considerable FCF ramping in 2019, OIC expanding, and margin expansion possibilities; CZR was downgraded to neutral at Bank America with $9 tgt as is more cautious longer-term towards Las Vegas pricing power and growth

·     Auto sector; Ford (F) shares fell as said its profits could improve this year despite expected flat global auto sales but added that it expects profits for 2018 will come in at the lower end of previous guidance; auto suppliers active after ADNT preliminary Q1 results missed estimates, and it flagged rising labor costs in Mexico and pressures from weaker global currencies for the year (guided Q1 revs $4.148B on Ebitda about $175M vs. est. $4.17B/$235M)

·     Services; ARMK shares active after Bernstein noted the potential shutdown risk as the US Government is 14% of Aramark’s revenue. One notable statistic only presented in the AR is that federal, state and local governments were 14% of 2018 revenues

 

Energy

·     Inventory data: last night the API reported that U.S. crude supplies fell by 560,000 barrels for the week ended Jan. 11, showed that gasoline stockpiles climbed by 6 million barrels, while distillate inventories rose 3.2 million barrels. Meanwhile the EIA showed weekly crude stockpiles fell -2.68M barrels vs. an est. -2.5M barrel draw, though gasoline and distillate data was bearish as gasoline stockpiles rose +7,503M barrels vs. 3M est. and Distillates +2,967M vs. est. +1,350M

·     E&P sector; Barclays busy today as initiates FANG at overweight in large cap space and XEC at EW and APA at underweight/also upgraded CXO to OW, and downgraded DVN to EW. In small/midcap initiate SM at OW; downgrade CDEV and CPE saying the confluence of increased capital discipline, strong capital efficiency, and fortified balance sheets provide the foundation for improved returns and sustainable FCF, and support their Positive sector view

·     MLP sector; Barclay’s upgraded WMB and BPL to Overweight, DCP to Equal Weight as the firm said it favors “safer” names with risk-on exposure tied to the Permian: Given their expectation for a more subdued commodity price outlook at least the first half of this year, they are favoring names that have less commodity price leverage with solid balance sheets (KMI, WMB, MPLX, EPD) with some “risk-on” exposure tied to the Permian names (ALTM, TRGP, PAA, NS)

 

Financials

·     Bank movers; another busy morning of large cap earnings (BAC, GS, BK, CMA, PNC) – tomorrow results are expected from AXP, BBT, CBSH, KEY, MS, MTB, PBCT, SBNY

·     GS Q4 EPS of $6.04 easily topped ests of $4.30 as net interest income rose and operating expenses and income taxes declined (Q4 net interest income of $991M increased 16% from Q3 and 10% YoY while operating expenses of $5.15B fell 8% from Q3 and rose 9% YoY); provision for income taxes fell to $170M from $554M in Q3 and $5.04B in Q4 2017. Q4 net revenue of $8.08B, down 8% from Q3 and unchanged from a year ago; exceeds consensus by $580M. Institution Client Services net revenue of $2.43B fell 22% from Q3 and up 2% from Q4 2017; FICC client execution net revenue of $822M fell 18% Y/Y; equities net revenue of $1.60B rose 17% Y/Y.

·     BAC Q4 results topped expectations on both the top and bottom lines, despite continued sluggish growth in its loan portfolio and a rocky quarter; EPS beat on higher fees and lower taxes, with the bank’s net interest margin also beat 

·     BK beat Q4 EPS estimates buy 6c as it earned more in fees from servicing assets that clients keep with the bank and kept a tight lid on expenses/a 10% rise in total fee revenue to $3.15 billion lifted overall revenue by 7.5% to $4 billion. Non-interest expenses fell 1% to $2.99 billion.

·     Regional banks: CMA said Q4 EPS of $1.95 beats by 8c while Q4 net interest income of $614M increases from $599M in Q3 and $545M a year ago; net interest margin of 3.70% improves from 3.60% in Q3 and 3.27% a year ago; FULT Q4 EPS misses the lowest analyst estimates as shares fell, while HAFC also drops following its earnings miss; PNC Q4 EPS of $2.75 missed by 5c on weaker NIM of 2.96% and higher provision for credit losses of $148M; SCHW with slight Q4 EPS beat as posts DARTS of 466K; USB Q4 EPS of $1.10 beats estimates by 4c, as total revenue of $5.82B up 3.9% as NII increased 4% on rising interest rates on assets, earning assets growth, and higher yields on reinvestment of securities, partially offset by higher rates on deposits and funding mix

·     Asset managers/investment advisors; BLK Q4 EPS of $6.08 falls short of consensus estimate by 20c as net inflows shrink by more than half/total revenue of $3.43B misses consensus by $10M; compares with $3.58B in Q3 and $3.76B a year ago; technology services revenue increases 19% Y/Y to $203M/Q4 total net flows $49.8B vs. $102.9B a year ago; iShares ETFs net flows $81.4B; BKCC, GPMT, PNNT, WHF downgraded at JPMorgan

·     Payments sector; M&A deal in the space as payment processor FISV agreed to buy FDC in an all-stock deal that values the company at roughly $39B or $22.74 https://on.mktw.net/2RLUnbN (shares of ACIW, WP, GPN, WEX, FLT were among movers on the deal)

·     Consumer finance and lending; Consumer finance stocks including NAVI and OMF were upgraded by JPMorgan to neutral from underweight on valuation ahead of 4Q results; NLY was upgraded to Overweight from Neutral at JPMorgan on their incrementally constructive outlook on rates -focused agency mortgage REITs, while downgraded SC to underweight on relative valuation; JPM also upgraded ARI, CGBD, KREF as well

 

Healthcare

·     Top movers; overall sector was relatively quiet with no major earnings or research; Biotech movers; a day after being added to conviction buy list at Goldman Sachs and tgt raised, INCY was downgraded to neutral at UBS citing the recent run-up (+36% since 12/24; +24% YTD) which has largely stemmed from sector consolidation (BMY deal) while company fundamentals remained unchanged, shifting the setup to a more balanced risk/reward; APTX plunges after phase 2 study of its treatment for painful diabetic peripheral neuropathy did not meet its primary endpoint; TFX named to replace PCG in the S&P 500 index; LGND shares slipped after a cautious mention by Citron Research with a $35 tgt (shares traded at $115 at time of post)

 

Industrials & Materials

·     Industrial & Machinery; Mizuho said in the industrial space, its favorite ideas are more NA focused and have assets that yield: 1) a backstop to valuation and 2) have visibility into earnings despite what the broader macro does (favoring TRN, R and GATXWhile downgrading ALSN to Neutral from Buy largely on valuation; ERJ lowers FY18 revenue view to approximately $5.1B from $5.4B-$5.9B (est. $5.51B); delivered 91 total executive jets in 2018

·     Transports; airlines higher as UAL reported strong 4Q earnings, beating adjusted EPS number as results were driven by domestic unit revenue, up 6% YoY as the company’s strategy for building hub connectivity paid off on both the fare and load factor fronts; the report lifted airlines and transports in general; rails in focus tonight with CSX earnings expected

·     Metals & Materials; AA set to report earnings after the close tonight in aluminum sector; EU agrees to extend steel import curbs until 2021 Reuters reported; industrial metals rallied, led by copper, after China introduced fresh stimulus measures to combat an economic slowdown; Clarksons Platou recommended metals and mining investors fight the sell-off and buy the weakness (upgraded BTU but downgraded TECK and AKS)

 

Technology, Media & Telecom

·     Internet; SNAP shares fell as CFO Tim Stone departs just 8-months into the job to pursue other opportunities/also said expects to report revenue and Adjusted EBITDA results that are “slightly favorable to the top end” of its previously reported quarterly guidance ranges; YELP shares active after shareholder SQN issues a new call for the company to add new directors and look at strategic alternatives

·     Hardware & Software news; EFII plunges as preannounced negatively saying will miss both its sales & EPS estimates; sees Q4 EPS 45c-47c on revs $255M-$257M, below consensus of 60c/$280.71M as results were impacted by weakening economic conditions experienced across its direct businesses; ACN was upgraded to buy at Citigroup saying the stock trades at an attractive entry point for a high quality, defensive large-cap; EA shares dropped initially following news they are cancelling their open-world Star Wars game; IBM announced a $325 million agreement with JNPR

·     IT Hardware; Morgan Stanley downgraded the IT Hardware industry view to In-Line from Attractive, noting that hardware spending plans downticked more than any other technology category and across U.S. and European CIOs in the firm’s recent checks. Slowing growth makes it more difficult to own hardware-heavy data center stocks in the near-term, Downgraded HPE to Equal Weight and cut target to $15 from $21, and also downgraded NTAP to Underweight and cut target to $58 from $72, citing view that revenue growth is likely to slow materially. Has a preference for hardware stocks with a higher software mix, upgraded NTNX to overweight and raised price target to $58 from $57 and upgraded TDC to Overweight with raised tgt to $55

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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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