Market Review: January 18, 2019

Scott GreenDaily Market Report

Closing Recap

Friday, January 18, 19

Index

Up/Down

%

Last

DJ Industrials

336.25

1.38%

24,706

S&P 500

34.75

1.32%

2,670

Nasdaq

72.76

1.03%

7,157

Russell 2000

15.26

1.04%

1,482


 

Equity Market Recap

·     U.S. stocks tallied strong returns on Friday, closing out the day and week higher as the strong start to the New Year continues. The Dow Industrial Average has now bounced nearly 3,000 points from its December 26th lows of 21,712 as all major averages have jumped out of bear and correction territory over the last week. Are all the pieces in place for U.S. stocks to continue its rally from the late December lows? It appears possible after this week showed China and the U.S. are making strides towards trade reconciliation (more below – though no official deal appears a possibility in the near term), the Fed has gotten very dovish, with even some of the biggest “hawks” (such as George this week) saying it might be time to pullback on hikes, helping boost sentiment. If President Trump and the Democrats can come to a compromise and end the record long gov’t shutdown (not into its 28th day today), markets could get an additional boost.

·     Stocks jumped late morning after Bloomberg reported China has offered to go on a six-year buying spree to ramp up imports from the U.S., in a move to fix the trade imbalance. By increasing annual goods imports from the U.S. by a combined value of more than $1 trillion, China would seek to reduce its trade surplus — which last year stood at $323 billion — to zero by 2024. The offer, made during talks in Beijing earlier this month, was met with skepticism by U.S. negotiators, Bloomberg reported.

·     We go into next week’s busy earnings season following good returns from bank stocks this week, with the likes of GS, BAC, and a handful of regional stocks rallying. Transports were also busy with rail KSU, airline UAL and truckers JBHT and KNX all helping boost the sector after better-than expected results. The dollar rose, while the 10-year Treasury yield advanced for a fifth day in a row to 2.79%, helped by an expansion of U.S. factory production in December by the most in 10 months (though confidence data fell to 2-year lows). The pound weakened and the euro fell. Oil prices also surged 3%, rising for a third straight week. Retailers got good results from VFC as shares rise while TSLA shares dropped over 13% on weaker guidance/jobs cuts. US markets are closed on Monday for holiday and re-open Tuesday with busy earnings.

Economic Data

·     Industrial Production for December rose 0.3%, topping the 0.2% estimate after rising 0.4% in November (IP was revised down to 0.4% from 0.6% in Nov). Capacity utilization rose to 78.7% from 78.6% in Nov., revised up from 78.5%. Factory production rose 1.1% in Dec. after rising 0.1% in November

·     Preliminary Jan. Michigan Sentiment fell to 90.7 (lowest since Oct 2016) from 98.3 in prior month and below the est. for 96.8; the current economic conditions index fell to 110.0 vs. 116.1 last month; the expectations index fell to 78.3 vs. 87.0 last month

 

Commodities

·     Crude oil prices rise, end the day and week higher; WTI crude rose $1.73, or 3.32% to settle at $53.80 per barrel helped after OPEC provided specifics on its production-cut activity to reduce world supply, and as sentiment improved regarding the U.S.-China trade war potential resolution. Oil prices made it a third straight week of gains, rising 4.3%. On Thursday, OPEC’s monthly report showed it had made a strong start in December before the pact went into effect, implementing the biggest month-on-month production drop in almost two years.

·     Gold prices closed out the day lower, falling -$9.70, or 0.8% to settle at $1,282.60 an ounce on the dollar bounce and stock surge as investors rotated out of safe-haven assets. With today’s decline, gold price erased gains for the week, falling -0.5% over the last 5-days and closed at its lowest level thus far in 2019 (ad first weekly decline since mid-December).

 

Currencies

·     The U.S. dollar gained on the day and week, with the DXY up 0.25% above 96.30 late day, rising vs. the euro (falling -0.2% to 1.1365), the Pound (fell to lows, down -0.9% late day under 1.288 (off highs 1.2994 overnight) after its recent bounce off lows despite UK PM May’s rejected Brexit vote earlier in the week. The greenback rose vs. the Japanese yen as traders unwind defensive bets. The dollar overall got a boost on optimism about talks to end the trade war between China and the United States after recent media reports suggested both countries were considering concessions ahead of a Washington visit from Chinese Vice Premier Liu He on Jan. 30 and 31. Stronger-than-expected U.S. industrial production numbers also helped lift the dollar which posted its first positive week since mid-December.

 

Treasuries

·     Treasury market’s slid late day with the 10-year yield hitting his highest level of the week late Friday, topping 2.78% (up over 3 bps and well off last Friday closing levels of just below 2.7%) as investors rotated out of safe-haven assets (gold, bonds, yen) and into equities and commodities (oil rose 3%). Stocks got a pop after Bloomberg reported that China said to offer path to eliminate US trade imbalance. The 2-year yield rose over 3 bps to 2.61%, while the 30-year yield rose 1.9 bps to 3.095%, its highest levels in about month.

 

 

Macro

Up/Down

Last

WTI Crude

1.73

53.80

Brent

1.52

62.70

Gold

-9.70

1,282.60

EUR/USD

-0.0024

1.1365

JPY/USD

0.52

109.78

10-Year Note

0.035

2.782%

 

 

Sector News Breakdown

Consumer

·     Retailers; VFC shares jumped following stronger-than-expected 3Q results as EPS from continuing operations of $1.31 beat the $1.09 estimate on better revs of $3.94B; TIF said it now sees FY18 EPS at the lower end of $4.65-$4.80 view (vs. est. $4.81); holiday period same-store sales fell 2% and holiday-period net sales fell 1% to $1.04B; sees FY18 sales up 6%-7%; NLS shares plunged as 4Q pre-released results were well below our expectations, as both segments came up short of estimates/guides Q4 EPS 4c-5c on revs $114M-$116M below est. 56c/$150.5M

·     Non-apparel retail; GME reported an increase in holiday-period same-store sales and affirmed its full-year profit outlook/net sales for the nine-weeks ended Jan. 5 fell 5% from the same period a year ago; SPWH was upgraded to overweight at Piper as see poised for substantially better fundamentals and shares trade at the lowest valuation under coverage

·     Auto sector; TSLA shares slipped after the company said will cut “approximately” 7% of its full-time workforce, and will post a Q4 GAAP profit , but cautioned that number will be less than the $312M it posted Q3; KMX was downgraded to neutral at Wedbush as executions risks rise and cut its tgt to $60 from $70; GM estimates raised at Morgan Stanley after GM’s investor day, guidance, & mgmt discussions and reiterate overweight

·     Consumer Staples; KMB was upgraded to overweight at JPMorgan ahead of results as thinks price hikes fired off by Kimberly-Clark and some relief with cost inflation could help lift operating margins; protein stocks (SAFM, PPC, TSN) all higher after the WSJ reported U.S. and Chinese trade officials are in talks to reopen China’s market to U.S. chicken exports

 

Energy

·     Energy stocks active as oil jumped. CVX was upgraded to buy at UBS with a $135 price target saying says macro-level volatility emphasizes the value of a conservative and sustaining business model clearly embodied in Chevron’s strategy; in services, SLB reported Q4 EPS in-line on slightly better revs of $8.2B while saying it Cap-ex spending will be slashed by as much as 32% to $1.5B in 2019 amid a decrease in activity from North American shale producers; ESV and RDC said they will delay a planned approval of resolutions involving their proposed merger to allow RDC’s board more time to evaluate ESV’s revised proposal. Under the revised deal terms, RDC holders would receive 2.6 ESV shares for each RDC share, vs. the 2.215 exchange ratio offered in the original proposal. The Baker Hughes (BHGE) weekly rig count showed the total U.S. rig count plunged -25 rigs to 1,050 with oil rigs down -21 to 852 and gas rigs down -4 to 198

·     E&P sector; GPOR reports 4Q net production of 1,392.8 MMcfe/d, while forecasting 1,360 -1,400 MMcfe/d for 2019, and issues 2019 operational views; sets new $400M stock repurchase program; UPL rises following news that the Fifth U.S. Circuit Court of Appeals delivered a favorable ruling in the appeal proceedings about make-whole claims that had been asserted against the company

·     Utilities & Solar; CNP was upgraded to outperform at RBC as believe CNP’s merger with Vectren could close any day now, we have become more constructive on CNP’s core asset base with the merger process overhang behind; ED downgraded to neutral at Bank America following upwards of ~$0.30 -0.40 of EPS exposure to PCG and cautious headlines on pipeline permitting including risks to its MVP project,

·     Refiners; Citigroup said sector earnings could get sold on a weaker 1H 2019 set-up, as remains cautious for 1H19/sees earnings beats driven by crude cost advantages at PSX, MPC and VLO. Citigroup opens a 90-day negative catalyst watch on VLO, 30-day positive watch on PSX and downgrades DK to neutral vs buy given lack of near-term catalyst. Cowen said they expect PSX, PARR, and CLMT to beat consensus estimates on benefits from 4Q18 oil price drop but the firm overall remains cautious on the sector

 

Financials

·     Bank movers; regional banks with earnings today as large cap banks were mixed this week; STI Q4 adjusted EPS of $1.50 beat by 13c while Q4 net interest margin-FTE of 3.27% was stable vs. Q3 and Q4 net interest income of $1.55B rose from $1.51B in Q3 and $1.43B in Q4 2017; CFG Q4 EPS of 98c beat estimates by 4c as underlying return on tangible common equity improved to 14.1% in Q4 from 13.5% in Q3 and 10.4% in the year-ago period; RF Q4 EPS of 38c was in-line with estimates and said it sees 2019 adjusted average loans growth low single digit, consistent with forecast GDP growth; KEY was downgraded at BMO Capital and CBSH upgraded at Raymond James; other movers on earnings today included: OZK, FHN, PBCT; trust bank STT reported Q4 EPS that beat analysts’ estimates and is laying off 1,500 staff as part of a plan to reduce costs.

·     Cards and services; AXP posted Q4 EPS of $1.74, below consensus of $1.79 (GAAP results of $2.32 p/s included a one-time tax item of $0.58) as results were hindered by higher than modeled expenses, while loan loss provision came in well-above estimates said RBC/Piper said revenue and EPS miss was driven by a slowing of spending and lend volume growth

·     Consumer finance and lending; BTIG initiated coverage of specialty B2B payment solutions providers WEX and FLT at Buy with price targets of $198 and $253, respectively. While both WEX and FLT began as providers of fleet fuel cards which continue to represent a large portion of their revenues, during the past decade they have diversified their business models via acquisitions; shares of FNMA and FMCC soared Friday amid reports that the Trump Administration is working on proposal that would likely recommend that the mortgage-finance giants be released from government control as part of a broader plan for U.S. housing finance

 

Healthcare

·     Pharma movers; LLY said Phase III soft tissue study of Lartruvo did not meet primary endpoints of overall survival (OS) in the full study population or in the leiomyosarcoma sub-population; MYL estimates lowered at Leerink to reflect the near-term headwinds observed in IQVIA data likely due to product discontinuations at the Morgantown oral solid dose facility

·     Biotech movers; LXRX and SNY received a split FDA advisory committee vote of 8 – 8 that the benefits of their Sotagliflozin outweigh the risks as an adjunct to insulin to improve glycemic control in adults with type 1 diabetes; IMMU falls as announced that it has received a complete response letter (CRL) from the FDA for its Biologics License Application (BLA) of sacituzumab for the treatment of patients with metastatic triple-negative breast cancer due to outstanding manufacturing issues

·     Healthcare services and providers; CVS said WMT will allow its stores to continue to participate in CVS’s pharmacy networks to provide prescription drugs to patients through commercial and managed Medicaid programs; IQV was upgraded to buy at Jefferies saying the key drivers of their change in view are improving positive CRO feedback both in this survey and our channel checks; MDRX upgraded to overweight at KeyBanc following the company’s divestiture of Netsmart; EW was upgraded to buy at Bank America with $190 tgt saying pipeline trumps the competition and will likely become investors’ primary focus after the company settled litigation disputes w BSX

 

Industrials & Materials

·     Industrial & Machinery; in machinery, OTR Global upgraded shares of AGCO, CNHI and DE to positive from mixed as firm’s checks indicate strong late-season harvests, tariff-related subsidies and small OEM incentives resulted in U.S. farmers increasing year-end purchases and downgraded IR, JCI, and UTX to mixed

·     Transports; in rails, KSU topped estimates on both lines of its Q4 report as the company reports an operating ratio of 64.3% in Q4 vs. 64.0% a year ago and 63.9% consensus (report comes a day after mixed results from CSX); in airlines, RYAAY lowered its full-year profit guidance citing lower winter fares, and said further cuts could be on the way depending on how Brexit develops; in truckers, JBHT rises early on earnings, adding to the strength in the trucking space after KNX boosted guidance yesterday

·     Metals & Materials; US Steel (X) was downgraded to neutral at Longbow and lowering estimates following disappointing feedback collected from a quarterly OCTG survey showing decelerating demand evident throughout the energy channels, resulting in lower price and volume estimates for the company’s Tubular segment

 

Technology, Media & Telecom

·     Internet; NFLX with mixed quarterly results as Q4 EPS beat by 6c but sales of $4.19B missed the $4.21B estimate and guided Q1 EPS 56c on revs $4.49B below est. 94c/$4.60B while posted stronger-than-forecast international paid net additions for Q4 and Q1 guidance and U.S. Q4 growth was right in line; FB fell after the Washington Post said U.S. regulators have met to discuss imposing a record-setting fine against Facebook for some of its privacy violations 

·     Semiconductors; sector moved higher with the Philly index (SOX) rising as much as 2.5% topping 1,235 – as nearly all 30 components were higher led semi -equipment names (AMAT, LRCX, KLAC, MKSI); QCOM obtains preliminary injunction from Munich court against AAPL which was ordered to stop using part of a press release that claims all iPhones would still be available in Germany through phone companies and resellers after it was banned from distributing several versions of the device in the country

·     Software movers; TEAM shares traded to record highs following positive mentions by several analysts after quarterly results after beating revenues and billings, partially driven by pull-forwards in server products following price increases and better Q3 rev guidance (shares of SPLK, WDAY, ZEN among those active after results); PRGS reported top and bottom line Q4 beat but Q1 guidance fell short of consensus

·     Media & Telecom movers; IPG downgraded at RBC as now expect IPG’s organic growth to decelerate in 2019 by >200bps y/y after recent account losses

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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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