Market Review: January 17, 2019

Scott GreenDaily Market Report

Closing Recap

Thursday, January 17, 19

Index

Up/Down

%

Last

DJ Industrials

163.01

0.67%

24,370

S&P 500

19.86

0.76%

2,635

Nasdaq

49.77

0.71%

7,084

Russell 2000

12.59

0.87%

1,467


 

Equity Market Recap

·     U.S. stocks closed higher, but off their best levels following a late day spike as the WSJ reported U.S. officials are debating lifting trade tariffs on China to calm markets and give Beijing an incentive to make deeper concessions. The news sent stocks surging, with major averages trading above key technical levels for the first time in over a month. However, markets pulled back after CNBC reported that a Treasury spokesperson said that “neither Secretary Mnuchin nor Ambassador Lighthizer have made any recommendations to anyone with respect to tariffs or other parts of the negotiation.” Industrial, materials and semiconductor stocks were among the biggest movers following the WSJ report before paring gains. Overall, U.S. stocks overcame early weakness to trade higher on Thursday, putting the S&P 500 on track its third consecutive gain. The initial late day move pushed the S&P 500 index above its 50-day MA resistance of 2,626, led by a gain in industrials (BA, CAT) on the tariff news. The news also caused a sell-off in Treasuries as yields moved to their highs of the week. The dollar’s gains faded into the afternoon session while oil prices finished lower while markets await earnings from Netflix after the market close. Financials pulled back after outperformance yesterday as Morgan Stanley missed both the top and bottom line today on weak trading results (common theme thus far for brokers). Caution flags still remain given Brexit uncertainty, volatile commodity markets, the gov’t shutdown and trade tensions still between the US and China.

Economic Data

·     Weekly Jobless claims fell 3K to 213K, below the 220K est. while prior week claims unrevised at 216K; the 4-week moving avg. stood at 220.75Kk in latest week; continuing claims rose 18K to 1.737M in the week ending Jan. 5; unadjusted initial claims filed by federal employees rose 5,694 to 10,454 in the week

·     Philly Fed Index for January rises to 17.0, topping the 9.5 estimate and prior month reading of 9.1; Jan. prices paid fell to 32.7 vs 38.9, New orders rose to 21.3 vs 13.3 and employment fell to 9.6 vs 19.1; also, shipments fell to 11.4 vs 12.4 and inventories fell to -7.6 vs 2.6

 

Commodities

·     Oil prices fell, but finish well off their worst levels as the U.S. oil benchmark has risen in 11 of the past 13 sessions. Today, WTI crude settles at $52.07, falling 23c on the day, but well off the intraday lows of $50.98 while Brent settled at $61.18 per barrel down 14c. Oil futures declined following recent data showing a weekly climb in U.S. crude production, as concerns over a slowdown in energy demand from China lingered. Natural gas prices rose early amid colder weather temperature forecasts along the east coast this week and after the EIA said weekly stockpiles fell by 81 bcf in the latest week, mort than the -79 bcf estimate.

·     Gold prices ended lower, falling -$1.50 to $1,292.30 an ounce in narrow trading again today and pulled back from two-week highs, failing to top the $1,300 an ounce level several times this week. Recent stock strength has kept the precious metal in check, though dovish comments from the Fed recently has helped keep prices higher. Concerns over political turmoil in the U.K. (failed Brexit vote) and U.S. (gov’t shutdown) have also been supportive of gold.

 

Currencies & Treasuries

·     The dollar index (DXY) traded flat, holding around the 96 level for a second straight day, mixed vs. major currencies. The British pound rose to 2-month highs vs. the US dollar above 1.30 briefly (up more than 0.9%), while edging higher vs. the euro as well despite failed Brexit deal this week. The dollar gained vs. the Japanese yen following the late day tariff conflicting headlines.

·     It has been a tight range for Treasury yields this week, with the 10-year holding above 2.70% but never really moving above 2.74% – same today, trading near the top end of that range until the tariff news, which then pushed yields higher. Today an auction of new 10-Year TIPS generates real yield of 0.919%, 19 basis points below a similar reopening auction in November 2018, just two months ago. Shorter-term yield spreads have narrowed with the 1-yr 2.56%, 2-yr 2.55%, 3-yr 2.54% and 5-yr 2.55%. A lack of economic data over the last 3-weeks due to the government shutdown has played a part of the tight ranges.

 

 

Macro

Up/Down

Last

WTI Crude

-0.24

52.07

Brent

-0.14

61.18

Gold

-1.50

1,292.30

EUR/USD

-0.0000

1.1392

JPY/USD

0.19

109.28

10-Year Note

0.027

2.749%

 

 

Sector News Breakdown

Consumer

·     Retailers; SIG shares slide to lowest levels in a decade after saying it sees 4Q comparable sales down 1.6% to down 2.5%, compared with the average analyst estimate of up 0.8%/sees FY19 comparable sales about flat; VFC reports earnings tomorrow morning; overall rebound in department stores/apparel names after falling over the last week of softer results/guidance from JWN, KSS, M; today broadline names were lower with weakness in HD and LOW earlier; FOSL announced it would sell select smartwatch technology to Google for $40M

·     Consumer Staples & Restaurants; CMG was downgraded to hold at Maxim as the share price surpassed our price target earlier this week, while Lop Capital raised its tgt to $600 following the company’s presentation at the 2019 ICR conference in Orlando; UNFI gives back much of yesterday’s gains, after jumping 28% Wednesday following guidance

·     Leisure movers; Longbow with a negative call on HOG shares and lowering estimates after our end of quarter checks revealed continued weakness in HOG’s U.S. retail sales and skepticism amongst the dealer network surrounding HOG’s Livewire launch; SEAS was upgraded to outperform at Wells Fargo rating on a confident view of the theme park operator’s turnaround strategy/thinks SeaWorld’s 2020 EBITDA goal of $475M to $500M is reasonable

·     Casinos/gaming; PENN was upgraded to buy from neutral at Nomura following a 26% decline in its stock price LTM, with catalysts: positive estimate revisions, free cash generation of approximately $3.10/share this year and $4.50 next and prospect for continued strength in consumer spending

 

Energy

·     OPEC said oil production fell in December as oil output fell by 751,000 barrels per day to 31.6 million barrels per day in December according to their monthly report. Saudi Arabia slashed its production by more than expected, by 468,000 bpd to just over 10.5 million bpd as the cartel kept pledge to cut daily output beginning in January as global oil prices plunged.

·     Movers; Husky Energy (HUSKF) said it will drop its hostile takeover bid for MEG Energy (MEGEF) after its minimum tender threshold was not achieved before yesterday’s 5 p.m. ET deadline. Husky had offered to buy its Canadian rival for C$11/share in cash or 0.485 of a Husky share; ESTE fell as preannounced Q4 production -18%/-19% vs. estimates and unveiled FY19 production guidance that was -15% vs. Seaport ests on a significantly higher capex budget; TA rises as agreed to acquire twenty travel center properties from HPT for $308.2M and amend some leases

·     Oil equipment and services; Cowen upgraded HAL and PUMP to outperform, turning more positive on pressure pumpers adding that investors fear downside to 1H 2019 estimates, though they see completion activity to grow in 2Q19 and beyond (also upgraded APY to outperform on valuation and downgrades CVIA, NBR, SPN to market perform given more levered balance sheets/top picks BHGE, APY).

·     JPMorgan said they see scope for recent valuation compression relative to NAM beta stocks to normalize, favoring pair trades (long DRQ, FI) against land driller shorts like HP and PTEN (both rated Underweight) and also like FI as a long hedge against UW offshore drillers (ESV, NE, RIG).

·     Utilities & Solar; SEDG was downgraded to underperform at JMP Securities as believe it may be difficult for the stock to sustain its current valuation given the likelihood that EBITDA and earnings decline YoY in 2019; PCG bounced early (rose as much as 17% before paring gains) as shareholder BlueMountain Capital is challenging the company’s plan to file for bankruptcy – by day’s end, shares were down as much as 10%.

 

Financials

·     Bank movers; another buys morning of earnings as Societe Generale SA France (GLE.FR) said Q4 was affected by a challenging environment in global capital markets, and this will cause a decline in revenue in its Global Markets/expects revenue in this business to fall by around 20% in Q4; MS shares fell as Q4 EPS of 73c missed the 89c estimate as results in fixed income sales and trading weighed on shares/Q4 revenue of $8.55B fell from $9.50B in the year-ago quarter; MS sales and Trading revenue fell to $2.5B from $2.7B Y/Y, with FICC revenue falling 30% to $564M YoY

·     Regional banks; BBT Q4 EPS of $1.05 beat consensus estimate by 1c while total revs of $2.94B, missed the $2.97B est/Q4 net interest margin 3.49%, up 2 basis points from Q3; KEY Q4 EPS of 48c beat by a penny while mgmt notes that credit quality remains strong and net charge-offs to average loans of 0.27% are below target range/non-performing loans declined $100M from Q3; CBSH Q4 earnings topped estimates, SBNY Q4 earnings beat with higher net interest income sending shares higher; MTB posted earnings and revenue beat on lower provision for credit losses ($38M vs. $42M est.) while NIM was 3.92%; FULT was downgraded to neutral at Piper

 

Healthcare

·     Pharma movers; JNJ reports a research study in collaboration with AAPL’s iWatch to see if irregular rhythm notifications and ECG app can accelerate the diagnosis and improve the health outcomes of people living with atrial fibrillation; LPCN rises after encouraging data from an open-label single-arm study evaluating NASH candidate LPCN 1144 in 36 hypogonadal males with at least 10% baseline liver fat; ADMP active in reaction to commercialization partner NVS’ Sandoz’s U.S. launch of Symjepi (epinephrine) for emergency treatments of allergic reactions

·     Biotech movers; REGN US peak sales estimate for Dupixent in asthma raised to $1.6B by 2023 from $292M, and to $557M from $206M at Canaccord; FOLD upgraded to buy at Citigroup as expectations on accelerated approval for ATGAA have come down and we also feel more confident on pivotal trial timelines as the company has opened 90 sites for enrollment; FPRX was upgraded to outperform at Wedbush citing favorable risk/reward

·     Healthcare services and providers; dental sector initiated at UBS today as ALGN rated buy and $230 tgt citing the company’s dominant market share and best-in-class technology and predicts revenue can grow 24% in 2019, higher than consensus; XRAY was named neutral and $42 tgt saying the near-term set-up looks better than the longer-term, PDCO neutral as its two primary business face long-term margin headwinds that should cap valuations, and HSIC initiated sell as sees ongoing margin pressures offsetting HSIC’s cost-saving initiatives and partnership synergies

 

Industrials & Materials

·     Transports; Dow Transports up around 0.8% as nears the 9,700 level (well off its 52-week lows of 8,636 on 12/24) – led by truckers today (JBHT, LSTR) after KNX raised guidance in trucking space; KNX boosted its forecast for Q4 EPS to 91cc-93c from prior view 71c-75c and Q1 EPS 52c-55c vs prior view 50c-54c based on rev/loaded mile increases ex-fuel surcharge, improved safety results, among other items; in rails, CSX Q4 results came in slightly better than expected and announced a $5B share buyback while issued revenue guidance for low single-digit growth in 2019

·     Metals & Materials; AA 4Q results beat expectations by 8c on EPS on better revs but lacked 2019 Ebitda guidance as the co is now disclosing more detail on the use of cash flows; metals were generally strong led by gains in copper and steel names (AKS, X, CLF, NUE) ; Alio Gold and HL were downgraded at RBC Capital to sell, saying the mining companies’ limited near-term cash flow is putting further strain on existing operational challenges

·     Chemical sector; EMN was upgraded to outperform at Morgan Stanley saying the company’s valuation has gone more than a step further in terms of implied negative EPS revisions; earnings weak today however as PPG reported better than expected Q4 earnings, but warns 1H’19 results will be affected by cost inflation carried over from 2018, unfavorable foreign currency translation and modestly lower sales volumes/also said it will consider splitting into two paint-making companies; FUL shares fell after quarterly earnings and revenue came in short of consensus views on weaker margins; FOE lowers year EPS view to $1.45-$150 on Ebitda $257M-$262M, below prior view $1.55-$1.60 and $270M-$275M

·     Defense stocks gained (NOC, LMT, RTN) after President Trump unveiled the first overhaul of U.S. missile defense doctrine in nearly a decade. Known as the Missile Defense Review, the report emphasizes the need for a “comprehensive approach to missile defense against rogue state and regional missile threats” and calls for the development of new technologies to its system in the future.

 

Technology, Media & Telecom

·     Internet; NFLX expected to report earnings after the close tonight; rest of Internet space appeared to be in “wait and see” mode ahead of NFLX earnings which could set the bar for the sector; recall NFLX shares have already jumped this week after announcing its price increase

·     Semiconductors; another iPhone supplier lowers views as TSM gave a revenue outlook that was sharply below expectations, guiding to $7.3B-$7.4B, below the $8.1B estimate and predicted a gross margin at least 2.5 percentage points below projections; XLNX was upgraded to buy from neutral at Mizuho with $100 tgt given its 5G exposure and said sector top pick is AVGO with its 5G exposure and networking, while ON with ADAS and EV, CY with ADAS, AMD with server market share gains all look attractive here; NXPI was upgraded to buy at Nomura largely on valuation after correcting almost 40% from a 52-week high

·     Software movers; EA was downgraded in video game sector at Jefferies as believe growth for EA’s key profit engine Ultimate Team is plateauing, and now forecast Adj. Operating Income margin compression of 300bps Y/Y in F’19

·     Hardware & Component news; FFIV downgrade to Market Perform at William Blair based on recent VAR checks that suggest stagnant demand in F5’s enterprise business, and uncertainty around the success of F5’s upcoming cloud-native ADC offering due to potential product positioning challenges and increasing competition in cloud-native ADCs; ; Barclay’s downgraded COHR to EW and tgt cut to street low $125 and cut QTNA to underweight saying it sees little traction for its Wave 3 products outside of its original wins; ROKU shares rallied after news that Walmart is scrapping its plans to launch a new video streaming service

·     Hard disk drive stocks weak; Nidec cut FY guidance by with revenue now expected at ¥1.450T from prior ¥1.600T, net income to ¥112.00B from prior ¥147.00B and operating profit to ¥145B from prior ¥195.00, EPS to ¥379.91 from prior ¥498.63; WDC falls as Deutsche expect WDC to deliver F2Q results that are at the low end of company’s guidance for revenues and EPS and Wells Fargo said “we’re expecting a negative guide; while we think shares of WDC could trade back to the low-$30 range NT, we remain positive on the LT risk/reward” (STX fell as well)

_________________________________________________________________

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.

Live Trading

Open an Account

Paper Trading

Register