Market Review: February 06, 2019

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Closing Recap

Wednesday, February 06, 2019

Index

Up/Down

%

Last

DJ Industrials

-21.22

0.08%

25,390

S&P 500

-6.02

0.22%

2,731

Nasdaq

-26.80

0.36%

7,375

Russell 2000

-2.17

0.14%

1,518


 

Equity Market Recap

·     U.S. stocks closed modestly lower on Wednesday, taking a breather after strong market returns since last Wednesday, snapping the 5-day win streak for major averages. U.S. stocks have been buoyed following better earnings, economic data (jobs), and a more dovish Fed on rates, while Treasury yields have slipped in recent weeks and oil prices have climbed. Semiconductors paced gains in tech while software stocks slumped and video game names (EA, TTWO) dropped on weaker outlooks. Stock pared losses late day in part to a rebound in Healthcare stocks. Despite today’s pullback, major averages still remain near 2-week highs heading into another heavy dose of earnings tonight and tomorrow. Economic data was mixed as the U.S. trade deficit narrowed more than forecast in November to $49.3 billion from a revised $55.7 billion. Reaction in markets to President Trump’s State of the Union address was muted while trade hopes remain as U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin travel to Beijing early next week to continue trade talks as a March 1 deadline to reach an accord nears. Late afternoon, former Fed Chair Yellen said the next move could be a rate cut or a hike, in a CNBC interview. She thinks that the Fed is around neutral, and that shouldn’t necessitate a preemptive move. Meanwhile, Fed Chairman Powell hosts a town hall meeting with educators tonight.

Economic Data

·     The U.S. trade deficit fell -11% and narrowed to $49.3B in Nov. vs. the est. $54.0B and from $55.7B in the prior month; Imports fell 2.9% in Nov. to $259.19b from $266.88b in Oct. while exports fell 0.6% in Nov. to $209.87b from $211.18b in Oct.

·     U.S. productivity in the final three months of 2018 showed a 1.3% increase in the manufacturing sector, up from 1.1% in the third quarter. Manufacturing output rose 2.3% and hours worked were up 1%. Hours worked for all U.S. workers rose 1.6%. The preliminary report lacks key figures on unit-labor costs

 

Commodities

·     Oil futures reversed higher off earlier losses, as WTI crude closed up 35c or 0.7% to $54.01 per barrel (off earlier lows of $52.86 and off highs of $54.30) after somewhat bullish inventory data slightly overshadowed the surge in the dollar (which hit commodity prices again). The EIA reported a smaller than expected build of 1.26M vs. est. 1.85M with gasoline +513B vs. est. +1,500M and distillates -2,257M vs. est. -2,000M. Gold prices slipped for a 4th straight day, down -$4.40 or 0.4% to settle at $1,314.40 an ounce, extending recent declines as the dollar bounces to two-week highs.

 

Currencies

·     The U.S. dollar extended its gains for a third straight session as the dollar index (DXY) advanced to fresh two-week highs of 96.40; the euro trades to afternoon lows, down -0.35% at 1.136 as Italy falls short on reforms, sees growth under 1% through 2023, while the greenback touched highs around 110 vs. the Japanese yen. The British Pound erased earlier gains, slipping later afternoon as the US dollar rose broadly on the day. The Australian dollar fell sharply after its central bank boss shifted to neutral monetary policy guidance.

 

Bond Market

·     Treasury prices were mostly steady despite a weaker 10-year auction, with the 10-year yield staying around 2.7% most of the session. The U.S. Treasury sold $27B in 10-year notes at a yield of 2.689% vs. 2.681% when issued, its lowest yield since January 2018, with a bid-to cover at 2.35 vs. 2.51 in previous auction and indirect bidders awarded 59.5% of notes (weak auction given higher yield at lower demand).

 

 

Macro

Up/Down

Last

WTI Crude

0.35

54.01

Brent

0.71

62.69

Gold

-4.80

1,314.40

EUR/USD

-0.0042

1.1364

JPY/USD

0.02

109.99

10-Year Note

-0.009

2.693%

 

 

Sector News Breakdown

Consumer

·     Consumer; CPRI shares rise after providing longer-term forecasts that point to stability, guiding year profit slightly above prior views on better Q3 results (comp missed) – results follow better earnings yesterday from RL – though FOSL shares slip on cautious watch comments from CPRI; CHD shares were upgraded by three analysts (Morgan Stanley, Goldman, Deutsche) following yesterday’s sell-off; BOOT shares rise after reporting a 9.2% jump in same-store sales during Q4 while year EPS guidance slightly above views (revs below); NUS shares dropped following a weaker outlook

·     Housing & Building Products; TCS shares fall after Q3 EPS and sales (7c/$221.6M vs. est. 12c/$230.5M) miss lowest ests while comp sales fall (-0.8%) and says sees sales at lower end of view; as a whole, homebuilders under pressure today, led by declines in TOL, KBH, MTH, DHI shares rallied after Q3 results; note Treasury Sec. Steven Mnuchin told CNBC he prefers to overhaul housing market with Congress but that he can also do it using administrative tools if lawmakers don’t act

·     Casino & Leisure movers; in cruise lines, NCLH was upgraded to overweight at Morgan Stanley driven by solid channel checks at the start of "wave season," US leisure preference, and earnings upside/also see an attractive valuation following a significant de-rating in ’18; RCL 4.8M share Block Trade priced at $116.50; SEAS announces the appointment of Gustavo Antorcha as CEO (was formerly COO of CCL); boating stocks rise led by MBUU after Q4 earnings beat

·     Autos; GM Q4 profit topped consensus as EBIT-adj of $2.8B, driven higher by a $3.0B EBIT-adj tally for the North America business/International EBIT-adj was flat; Daimler AG said that Q4 earnings slumped despite the company generating higher revenue and selling more cars, and declared a lower dividend for the year (after-tax profit plunged to EU1.64B vs. EUR3.22B YoY); TM slashed its profit forecast by 19% to 1.87 trillion yen ($17 billion) for the year through March, well below the 2.35 trillion consensus, after write-downs on equity holdings

 

Energy

·     Inventory data: The API reported that U.S. crude supplies rose by 2.5M barrels for the week ended Feb. 1; showed that gasoline stockpiles climbed by 1.7M barrels, while distillate inventories edged up by 1.1M barrels. The EIA reported a smaller than expected build of 1.26M vs. est. 1.85M with gasoline +513B vs. est. +1,500M and distillates -2,257M vs. est. -2,000M

·     E&P sector; APC Q4 results were weak across the board with capex above the high end of guidance and EBITDA -9% vs. the Street while Q1 oil production was guided -5% vs. consensus, although FY19 guidance was reiterated; HCLP shares fell (weighing in frac names SND, EMES, CVIA) as missed on EBITDA ($11M vs. $15M est.) though guided for a 21% to 32% sequential increase in sales volumes at flat pricing for Q1:19; VNOM shares rose on earnings

·     Equipment and services; LBRT Q4 results slumped below Stifel expectations with adjusted EBITDA sliding 39% sequentially to $72.0 million and missing their estimate by 17%; SU posted a Q4 loss primarily due to steep price discounts for Western Canadian oil

·     Utilities & Solar; in solar, CSIQ raises Q4 guidance for revenues and shipments and reassuring investors on its exposure to the PG&E bankruptcy. CSIQ says it now expects Q4 shipments of 1.90-1.95 GW, compared to its previous guidance of 1.67-1.72 GW, on higher revs and margins; in utility earnings from SR, NJR and ATO were out

 

Financials

·     Bank movers; Wall Street faces extra-tough stress tests this year, with the Fed requiring banks to show they can keep lending during a harsh global recession. The 2019 exams will assume a jump in U.S. unemployment to 10%, and yields on 10-year Treasuries falling with commercial real estate and housing prices. Piper positive on Texas banks saying recent work leads them to have the most near-term conviction on VBTX, CMA, and LTXB in Texas, and think two names that have credit fears (TCBI and CADE) will rebound from very low valuations over time

·     Insurance; ALL rises as Q4 EPS $1.24 beat the $1.10 est. while Q4 catastrophe losses $963M vs. $599M last year; CB posted a big Q3 EPS loss (76c vs. est. $1.95) sending shares lower; TMK Q4 EPS was in-line on lighter revs; UNM Q4 operating revs of $2.88B missed the $2.92B est.; VOYA reported a 10c EPS beat

·     Consumer finance and lending; PYPL was downgraded to neutral at Guggenheim citing near-term headwinds to payment volume growth from Brexit and cross-border issues, and medium-term headwinds from weakness at eBay Inc. and tougher competition

 

Healthcare

·     Pharma movers; President Trump in his State of the Union address renewed his call to bring down drug prices even as the Street said his address revealed no new surprises; LLY falls early after missing Q4 EPS and lowered its 2019 outlook after the Loxo Oncology deal; GSK posted a top and bottom line quarterly beat; VRTX 4Q results that beat expectations, driven by strong sales of Orkambi and Symdeko; AXSM reached an agreement with the FDA under a Special Protocol Assessment for the Momentum Phase 3 trial design, endpoints and statistical approach of AXS-07 to treat acute migraine in adults with or without aura; VNDA downgraded at Cantor to reflect Tuesday’s discourse of FDA interactions that appear challenged; ELAN falls after Lilly said it would start selling its stake in the “coming days” and could potentially get rid of it entirely

·     Biotech movers; MGNX shares soar after the company announced that the Phase 3 trial of potential breast cancer treatment margetuximab met its primary endpoint; REGN shares active (52-week highs) after beating on both top and bottom line handily; FATE announced that the FDA had cleared its investigational new drug application for FT516, a potential therapy for patients with certain blood cancers

·     Cannabis stocks were mostly lower Wednesday, led by APHA after the company rejected a hostile bid from Green Growth Brands Inc. that it said significantly undervalues the company.

·     Medical equipment and devices; in medical devices, BSX posted a 3c EPS beat on in-line revenue while midpoint of year EPS missed views; in healthcare services and providers,, HIIQ shares declined following disclosures on sales by its CEO sells $3.2M of shares and CFO which sells $1.9M; HCSG shares slide after mixed Q4 results as the revenue miss was due to revised dietary contracts that eliminated pass-through revenue

 

Industrials & Materials

·     Chemical sector; DWDP, CE, EMN, MEOH, and ASIX were all downgraded at Cowen in sector call as the firm turns more cautious on industry fundamentals than consensus, which is calling for a 2h19 cyclical recovery in earnings. Firm says that the Street underappreciates the substantial, near-term headwinds from feedstocks, increased capacity and a weakening macro that will likely pressure margins and mute any potential earnings growth until at least 4Q19

·     Industrial & Machinery; The European Union rejects the planned merger between rail units of Siemens and Alstom, saying the combination would have hurt competition and led to higher prices for consumers; OI missed substantially operationally in 4Q18 on weak volume/mix, guided well below consensus for 1Q19

·     Heavy duty trucks (CMI, PCAR, NAV, ALSN); sector weak two-fold: 1) CMI reported lower than expected Q4 earnings and guiding full-year revenues below analyst estimates, raising concerns of slower truck sales this year; 2) separately, January Class 8 orders fell 68% y/y to 15,800, according to ACT Research data, marking the third consecutive month of y/y declines after orders significantly exceeded expectations throughout the seasonally weak 3Q

·     Metals & Materials; iron ore producers were active (CLF, RIO) as iron ore rallied toward $90 a ton after VALE declared force majeure on some contracts, raising worries of a global shortfall; overall metals sector pulled back from recent gains (steels, gold)

 

Technology, Media & Telecom

·     Internet; SNAP shares jumped as analysts noted stabilizing DAU trends (flat in 4Q vs. expected decline) and redesign of Android could drive an improvement in 2019 as well as continued solid ad growth driven by revenue/user up 37% y/y in 4Q and adoption of its self-serve ad platform and an outlook for improved EBITDA performance; SPOT Q4 narrowly missed on revenue with a reported $1.702B (est. $1.71B), grew subscribers and included two podcast acquisitions/Q1 guidance has in-line revenue of €1.35-1.55B (€1.47B) with MAUs from 215M to 220M; SFLY falls as reports another disappointing quarterly result and FY19 outlook, while board undertakes of a strategic review amid incoming buy-out interest, and announces CEO departure

·     Semiconductors; SWKS rises as posted in-line Q1 results with downside Q2 guidance that has revenue from $800M to $820M (est. $851.49M) while board approves a new $2B share repurchase program; MCHP reported a Q3 beat and lower Q4 guidance, but rebounded after the CEO predicted the current quarter would mark the bottom of the cycle for the chipmaker barring any new negative developments in the trade war between the U.S. and China; MTSI falls as misses Dec Q revenue/earnings expectations and guides substantially lower for the Mar Q, with revenue expected to be down 8.4% q/q at the revenue midpoint; SoftBank’s Vision Fund discloses selling its entire NVDA stake in January which was worth $3.6B at the end of December.

·     Software movers; ZEN shares rise after Q4 EPS beats and revenue up 41% Y/Y to $172.2M with upside guidance has Q1 revenue from $178M to $180M (est. $172.84M) and FY19 revenue from $795M to $805M ($779.31M), as analysts raise tgt prices; MODN reported a F1Q19 beat and reiterated guidance for FY19; TENB slipped despite better results as provided a better than expected outlook for both Q1 and 2019 and Q4, current billings and revs topped views; MANH better Q4 results though street focused on lack of any notable upside to license/cloud trends in the quarter; other earnings movers in software included: PAYC, DATA,

·     Video game sector under pressure after EA cut its forecasts for profit and revenue for the year saying it sees FY19 adjusted revenue about $4.875B vs. prior view of about $5.2 billion, with many analysts expressing surprise by the weak outlook; TTWO adds to sector weakness as reports mixed Q3 with net bookings up 140% to $1.569B as both Digital Online revs $594.7M (est. $678.4M) and Physical Retail revs $654M (est. $804.1M) missed while guidance disappoints

·     Media & Telecom movers; Dow component DIS posted big earnings beat while ESPN subscribers improved again, now for the 6th straight qtr, to down only 1% Y/Y, and U.S. Cable Nets affiliate revenue accelerated 70bp to +5.4% Y/Y; NYT rises after earnings as reports $709M in digital revenues; advertising companies fell; advertising stocks dropped (IPG, OMC, WPP) after Publicis results as Q4 organic revs fall 0.3% vs. est. up 2.5%; movie theatre chains (CNK, AMC weak as ComScore said U.S. box office recorded its worst January performance since 2013 with a box office haul of $815M a 16% Y/Y drop due to the government shutdown, extra cold weather and a weak slate of films during the month

·     Hardware & Component news; ARLO shares plunge as Q4 results were generally in line with the early December preannouncement, but forward guidance that significantly lowers 1Q and 2019 estimates (downgraded by analysts)

_________________________________________________________________

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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