Market Review: January 23, 2019

Scott GreenDaily Market Report

Closing Recap

Wednesday, January 23, 19

Index

Up/Down

%

Last

DJ Industrials

171.75

0.70%

24,576

S&P 500

5.82

0.22%

2,638

Nasdaq

5.41

0.08%

7,025

Russell 2000

-3.18

0.22%

1,454


 

Equity Market Recap

·     U.S. stocks were mixed on Wednesday, as the Dow Industrial outperformed behind earnings strength in IBM, UTX and PG which accounted for most of the gains in the index, while persistent concerns over global growth and trade tensions continue to plague broader markets. Despite earnings season rolling into full gear shortly, macro stories are still playing a big part of market moves. The trade/tariff issue between the U.S. and China remains influx with CNBC reporting late this afternoon Trump’s outside China advisor says there will not be a breakthrough in trade talks soon. President Trump said that the US is doing well in trade negotiations with China while warns China tariffs could increase if no deal reached. Venezuela Dictator Maduro orders all U.S. diplomatic personnel to leave the country, gives them 72 hours while Venezuelans took to the streets Wednesday in the biggest opposition rally in more than a year as critics of President Nicolas Maduro’s regime push for change. The U.S. government shutdown has also loomed as a potential threat as White House Economic Adviser Kevin Hassett said in a CNN interview that U.S. economic growth in the first quarter of 2019 could be “zero” if the shutdown were to last for the entire quarter. Major averages posted big market swings on the day (nearly 400 point swing in the Dow from high to low while the NASDAQ had an intraday swing of over 130 points from best to worst levels). Transports lagged, led by losses in UPS and FDX after the Wall Street Journal reported Amazon seeks to cut out many fees that the traditional carriers use to pad their revenues. Earnings focus tonight in tech with chipmakers TXN, LRCX and XLNX earnings results expected ahead of INTC tomorrow night. Oil prices dropped along with the dollar, while gold finished little changed and Treasury yields slipped.

 

Commodities

·     Oil prices slumped again, with WTI crude slipping 39c or 0.74% to settle at $52.62 per barrel dipping after a report that the European Union may soon launch a mechanism that would allow companies to bypass U.S. sanctions and trade with Iran, according to reports. The mechanism that would facilitate non-dollar trade with Iran, circumvent U.S. sanctions, Reuters reported Wednesday, citing comments from diplomats. The Trump administration “could impose Venezuela oil sanctions as soon this week if the political situation there deteriorates further,” Reuters Venezuela tweeted Wednesday, citing sources. Outside of that news, there wasn’t much in the energy space as weekly inventory data was pushed out to tomorrow due to this Monday’s MLK holiday. The API weekly inventory data is tonight. Gold prices bounce off earlier lows to settle higher by 60c at $1,284 an ounce, getting a boost mid-afternoon as the dollar sunk vs. rival currencies. Gold prices had dropped below the $1,280 an ounce earlier when stocks were strong.

 

Currencies & Treasuries

·     The U.S. dollar index (DXY) broke lower, falling out of a tight trading range prior and dipping to lows just above the 96 level as slowing global growth concerns remain. The Japanese yen slipped vs. the greenback after gaining the previous day on haven-related buying. Meanwhile, gains in Europe as the British Pound topped the $1.30 level against the dollar (highs $1.3081 – its best level since mid-November) as the opposition Labour party signaled it could support legislation to delay Britain’s departure from the EU. The euro was higher vs. the dollar ahead of the European Central Bank policy meeting tomorrow morning at 7:45 AM EST. Overall the dollar declined vs. most currencies (CAD, AUD, CHF). Meanwhile Treasury market’s gained as yields slipped, but in a tight trading range today, with the 10-year falling below the 2.75% level amid no major market moving economic data today (2-yr 2.59% and 30-yr 3.07%).

 

 

Macro

Up/Down

Last

WTI Crude

-0.39

52.62

Brent

-0.36

61.14

Gold

0.60

1,284.00

EUR/USD

0.0027

1.1387

JPY/USD

0.19

109.57

10-Year Note

-0.0013

2.746%

 

 

Sector News Breakdown

Consumer

·     Retailers; WMT was upgraded to Overweight at Morgan Stanley saying after 5 years of declines, they expect US EBIT to inflect in 2019, thanks to continued sales momentum, heightened cost control, and improving e-commerce margins; WWW was added to fresh pick at Baird saying after VFC positive December-quarter results/outlook, more confident in Q4/2019 estimates for WWW

·     Consumer Staples; Dow component PG tops estimates on both lines of its FQ2 report and issues strong guidance/Q2 organic growth was up 4% in Q4 to top the consensus estimate for a 2.6% gain, led by the Beauty (+8%) and Health Care (+5%) segments; KMB shares slipped early as reported quarterly profit that missed views amid rising material costs, while revs beat/its year profit outlook of $6.50-$6.70 missed the $6.79 estimate 

·     Auto sector; RBC Capital with several changes in auto/supplier sector – firm said global auto production is now estimated to fall 0.7% y/y in 2019, vs prior 0.4% and sees N.A., Europe, China – to post declines this year (firm downgraded ADNT, MTOR, DLPH while upped GTX); TSLA was also downgraded at RBC saying company seems to be more tactful with messaging which is a long-term positive, but means downward pressure to growth expectations. Overnight the European Union is prepared to hit 20 billion euros ($22.7 billion) of U.S. goods with tariffs should President Donald Trump follow through on a threat to impose duties on EU cars and auto parts

·     Housing & Building Products; DHI was upgraded to buy and TOL downgraded to neutral at Mizuho as they remain constructive on housing and see favorable support dynamics for the Homebuilder sector, with mortgage rates at 6-month lows heading into the key spring selling season, favorable demand / GDP growth for 2019, and the stocks trading at / near book value. Raymond James downgraded CBPX to market perform and is cutting estimates (EXP, USG) for the wallboard manufacturers, this time in order to more properly account for bearish U.S. industry volume data from the Gypsum Association; LOW was cut to hold at Loop Capital following review of the macro drivers, Lowe’s current state of affairs, and the strategic changes by company

·     Casino & Leisure movers; in gaming, JPMorgan tweaked MLCO’s Macau property-level EBITDA estimate for the 4Q18 following Macau’s recently released segment details for the market’s performance in the 4Q18 (i.e., mass and slots GGR up 16% y/y and VIP GGR up 3% y/y, generating market-wide GGR growth of 9% y/y). Nomura estimate average daily GGR was around MOP786mn, up roughly 10% sequentially vs. our estimate for the prior week (MOP714mn/day) but down ~4% MTD vs. our estimate for the same period last year In leisure, HZO with mixed Q1 as EPS beat and revs missed while backing profit guidance

 

Energy

·     Energy stocks active; OXY CEO said oil-price volatility is likely to increase in coming months at a panel discussion in Davos, Switzerland as sees Brent crude seen trading in $60-$70/bbl range in 2019; HES CEO said shale investors are telling the industry that its growth is unsustainable; CVX CEO said in Davos the global economy may be slowing down but sales of energy and industrial products do not indicate that growth will come to a halt

·     E&P sector; group weaker with broader market pullback; Citigroup transferred coverage of 11 SMid E&Ps as upgraded CPE to Buy, downgrade OAS to Neutral saying the E&P sector’s mandate shifted course in 2018 toward more prudent capital discipline as companies’ transition toward “manufacturing” mode. For the SMid Cap E&Ps, gone are the days of “Excel NAV” maximization via large outspend and outsized growth; DNR disclosed a generally favorable trial court ruling in the Riley Ridge helium supply contract case; Citigroup

·     Equipment and services; PUMP forecast Q4 revenue of $421M-$426M, topping the $414M analyst consensus estimate while also sees costs of services, exclusive of depreciation and amortization, of $299M-$304M, and G&A costs of $12M-$14M; RES earnings trail analysts’ estimates while 2019 view is cautious saying customers are re-evaluating spending after oil drop

·     Utilities & Solar; utilities stood strong in market reversal lower as investors rotate into the defensive assets; Wolfe Research upgraded their subsector rating on the Utility Integrateds to Market Overweight from Market Weight, as now have Outperform ratings on EXC and PEG

 

Financials

·     Bank movers; after rising 11-consecutive days in conjunction with the start of bank earnings two-weeks ago, the XLF ETFX has now fallen two straight days amid profit taking and a pullback in broader stocks in general (S&P snapped 4-day win streak yesterday); PGR Q4 EPS missed by over 20c and well below last year after Q4 results reflect $572.2M of pretax net realized losses on; there were several small/mid cap banks out with earnings today/overnight (ZION, HOPE, UBNK, UCBI, WSFS, WTFC) and more tonight

·     Consumer finance and lending; SYF shares surge as COF shares decline; SYF saved its card partnership with Sam’s Club, a deal threatened last year when WMT (Sam’s parent) said it would shift its co-brand and private-label portfolios to COF; both report earnings as well as COF with Q4 miss (core EPS $1.87, below consensus $2.39), while SFY earnings topped views and also renewed its partnership with Amazon.com Inc. during Q4

 

Healthcare

·     Pharma movers; MRK downgraded to market perform at BMO Capital for the first time in two years based on Merck’s over-dependence on Keytruda, the Street’s high expectations, and their views on upcoming competitor trials, believe the risk/reward in MRK is balanced here; TEVA was upgraded by both Piper (to neutral) and UBS (to buy) saying shares too cheap to ignore

·     Biotech movers; PTCT 6.72M share Spot Secondary priced at $30.20; JPMorgan said believe the biotech sector is favorably positioned heading into the 4Q prints and now needs to avoid any unforeseen material misses and/or pipeline slip – several ratings changes in SMID-cap biotech universe, including an upgrade of LJPC to neutral while downgraded APLS, EIDX, GTHX, NBIX and REPL to neutral

·     Medical equipment and devices; ARAY reported 2Q results which included 29% growth in gross orders driven by the first meaningful orders in China related to newly released licenses, continued strength with Radixact and better traction with CyberKnife according to one firm; WAT shares jumped after $4B share buyback, Q4 EPS beating by 23c on higher sales of $715M and a better FY EPS outlook of $9.20-$9.45 vs. est. $9.19; ABT reported in-line Q4 earnings while revenue missed consensus estimates

 

Industrials & Materials

·     Aerospace & Defense; Dow component UTX Q4 EPS of $1.95 and revs $18.04B well above consensus views benefiting from strong demand for aircraft parts, with strong year guidance (Sees FY adjusted EPS $7.70-$8.00 vs. est. $7.78) though sales view below views (1st earnings release since completing its $30B acquisition of Rockwell Collins in November); HII was downgraded to Underweight at Barclay’s as they see it growing below its industry peers on average; Credit Suisse previewed quarter as they expect solid y/y growth to continue for most names in Q4 as expect margin expansion from HRS, LLL, NOC; flat/down for LMT, RTN, GD, HII. Government shutdown has limited impact on hardware but Fed IT and GD are more vulnerable

·     Industrial and Machinery; AGCO downgraded to underweight at Barclay’s with a $63 price target, saying shares are fully valued with risks to the downside; CWST 3.1M share secondary priced @ $29.50

·     Transports; couple of earnings results expected out tonight – CP in rails and CVTI in truckers; UPS and FDX shares slipped late morning after the WSJ reported Amazon wants to handle more of its own deliveries to keep up with its growth and also loosen its reliance on other carriers

·     Tankers: JPMorgan upgraded EURN to overweight while STNG and TNP downgraded to neutral citing relative return expectations and says paradoxically, while the strength in tanker rates during Q4 was welcome, they are now incrementally more bearish on rates in 2019 as crude inventories have built and OPEC production cuts have been re-implemented

·     Chemicals and Materials; TSE shares dropped after cutting its Q4 EPS view to 20c-27c from $1.27-$1.46 (est. $1.23) and lowers year view to $7.21-$7.29 from $8.27-$8.46 (est. $8.25) saying rapidly declining feedstocks prices, particularly in the latter half of Q4, are expected to result in an unfavorable pre-tax net timing impact

 

Technology, Media & Telecom

·     Internet; VIPS was upgraded to overweight at KeyBanc with $110 tgt as sees a margin-boosting mix shift toward apparel as well as increasing turnover as benefits; EBAY said it will review and evaluate Elliott Mgmt proposal announced yesterday

·     Semiconductors; market prepares for earnings in sector with TXN, XLNX earnings tonight and INTC tomorrow night; ASML posted Q4 results above views but warned that delayed orders and swelling inventories would hit Q1 sales/sees Q1 revenues slowing to around EU2.1B, notably weaker than the EU2.78B est.; QCOM was named a new short by Kerrisdale Capital

·     Software movers; FEYE was added to fresh pick list at Baird saying Street expectations for CY19 operating margin/revenue appear conservative and we anticipate CY19 will be a breakout year for focus products such as Managed Defense and iSight; video game software companies TTWO, EA, ATVI continue recent slide – recall recently in NFLX earnings report, they said “We compete with (and lose to) Fortnite more than HBO (T).” Bloomberg noted TTWO weak amid reports that data from analytics firm YipitData showed “Grand Theft Auto Online” demand in the U.S. was particularly weak over the holiday season, although NBA 2K continues to be strong.

·     Media & Telecom movers; in cable, CMCSA shares rise after Q4 EPS beat by 2c, raised its dividend and announced 4Q high-speed Internet subscribers +351,000 with smaller sub losses in 4Q video net change -29K vs. Bloomberg estimate -73.5k; QUOT shares drop as lowers Q4 revenue view to $106.5M-$107.5M from $115.0M-$120.0 and also lowered FY18 revenue view; Hulu is lowering the price of its entry-level, ad-supported online TV service by 25% to $6 a month — a week after Netflix Inc. raised prices

·     Hardware & Component news; Dow component IBM shares jump as reported better revenues in the three important business units of Cognitive, GBS and Tech Services, particularly since FX was an incremental headwind/Q4 services signings were strong as well with guidance mixed; LOGI was upgraded to overweight at JPM owing to it being indexed to higher margin growth categories Gaming and Video Collaboration, Video Collaboration (VC) benefiting and an excellent balance sheet with; DOX shares pressured after named with “strong sell” recommendation from Spruce Point saying it has about 25%-50% downside to $30-$45/share; components TEL and APH both active after earnings and mixed guidance

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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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