Market Review: February 12, 2019

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Closing Recap

Tuesday, February 12, 2019

Index

Up/Down

%

Last

DJ Industrials

372.04

1.49%

25,425

S&P 500

34.81

1.28%

2,744

Nasdaq

106.71

1.46%

7,414

Russell 2000

19.25

1.27%

1,538


 

Equity Market Recap

·     U.S. stocks jumped on Tuesday after Washington lawmakers reached a tentative deal to prevent a government shutdown and optimism grew over a potential trade deal between the U.S. and China. The Dow Industrial Average rose as much as 400 points while the S&P 500 index topped its 200-day moving average for the first time since early December (above 2,743) and fear subsided as the CBOE Volatility index (VIX) down around 15.00, its lowest levels since early October. Today’s top story was the potential deal in Washington as GOP negotiators agreed to a border-security deal that will involve far less money for President Donald Trump’s border wall than the White House wanted, as the plan includes $1.38 billion for fencing instead of the $5.7 billion Trump asked for. Trump said midday that another government shutdown appears unlikely.

·     Regarding trade, U.S. Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer arrived in Beijing on Tuesday, ahead of high-level talks scheduled later this week. U.S. President Donald Trump said on Tuesday that he could see letting the March 1 deadline for reaching a trade agreement with China slide a little, but that he would prefer not to and expects to meet with Chinese President Xi Jinping to close the deal at some point. Earnings have taken a back seat to macro headlines of late, though this quarter has been solid thus far, as about 71% of the S&P companies that have posted earnings have topped expectations, said Reuters…but analysts’ estimates for Q1 earnings have turned negative for the first time since 2016.

Commodities

·     Oil prices end higher (but off their best levels) as WTI crude rises 69c or 1.32% to settle at $53.10 per barrel while Brent crude gained 91c or 1.48% to finish at $62.42 per barrel. Oil popped after OPEC said in its monthly report that the cartel’s production fell by nearly 800K bbl/day in January to 30.8M bbl/day, and Saudi Arabia pledges to cut output by at least 500K bbl/day more than it originally planned. Saudi Energy Minister al-Falih announced the move, which would reduce Saudi production to 9.8M bbl/day in March. April gold rises $2.10 or 0.2% to settle at $1,314 an ounce, snapping its recent slide from highs around $1,330 just two weeks ago.

 

Currencies & Treasuries

·     The U.S. dollar snapped its 8-day winning streak, falling against the euro and British Pound and emerging market currencies after the dollar index touched its highest levels of 2019 yesterday. Emerging market currencies (Peso, Brazil real) bounced as investors’ appetite for riskier assets increased and the dollar’s rally lost steam. The euro traded above 1.133 after hitting lows of 1.1258 earlier today (lowest since November). The greenback has rallied over the last 2-weeks despite a dovish outlook on rates from the Fed, benefitting from weaker economic outlooks in both European and Asian economies. Treasury market’s slid as yields rally given the “risk-on” mentality for US stock markets amid hopes of a trade deal with China and a tentative deal in Washington to avert another government shutdown; the 10-year yield rises above 2.68%.

 

Economic Data

·     The January small-business optimism index of the National Federation of Independent Business fell 3.2 points to a seasonally adjusted reading of 101.2, the worst reading since the election of President Donald Trump in Nov. 2016. The expectations components fell particularly sharply, with a 10%-point decline in those expecting the economy to improve

·     U.S. job openings rose 169K to 7.335M in December from 7.166M the prior month; Dec. job opening rate (job openings as a % of total employment plus openings) 4.7% vs 4.6% prior month; 3.482M people quit a job in Dec.; quit rate 2.3%

 

 

Macro

Up/Down

Last

WTI Crude

0.69

53.10

Brent

0.91

62.42

Gold

2.10

1,314.00

EUR/USD

0.0055

1.1331

JPY/USD

0.15

110.53

10-Year Note

0.029

2.682%

 

 

Sector News Breakdown

Consumer

·     Auto’s; the hits keep coming as Nissan the latest to lower its outlook as NSANY cut its operating income forecast for the full year to 450 billion yen, below prior view of 540.0 billion yen, and sees FY net income 410 billion yen, below prior view 500 billion yen. However, the overall beaten up auto sector bounced today on trade talk hopes

·     Retailers; UAA Q4 EPS beat by 5c on slightly better revs of $1.39B as 4Q adjusted gross margin 45.1% and reiterates 2019 outlook/sees Q1 revs flat to slightly down vs. est. up 2%; luxury retailer Kering (KER said its net profit more than doubled in 2018 compared with 2017 and raised its dividend for the year

·     Services; CHGG 4Q18 results showed strength in Chegg Services (35% y/y revenue growth and 38% y/y subscriber growth) and raised 2019 guidance for revenues and EBITDA; LABL shares fell as missed on core EPS by 37% in its F3Q19, reduced its FY19 core EPS guidance by ~15%, disclosed the loss of ~$50M of sales (3% of FY19E sales) from a large customer, and guided to flattish EBITDA in FY20

·     Consumer Staples; COTY rises as JAB affiliate proposes to commence a tender offer in which JAB Cosmetics B.V. would acquire up to 150M additional shares for $11.65 per share in cash https://on.wsj.com/2GlA53n; TAP said it concluded that its financial statements for the years ended Dec. 2016 and Dec. 2017 should be restated and no longer be relied upon – company also posted quarterly sales that missed estimates

 

Energy

·     The U.S. Energy Information Administration (EIA) lifted its forecasts for U.S. crude production for this year and next and cut its 2020 forecasts for U.S. and global benchmark oil prices, according to its Short-term Energy Outlook report released Tuesday. The EIA forecasts 2019 U.S. crude production of 12.41 million barrels a day, up 2.8% from the January forecast. It also raised its 2020 output view by 2.6% to 13.2 million barrels a day

·     Energy stocks were buoyed by a rebound in oil prices after OPEC reduced its estimate for the amount of crude the world needs it to pump this year as U.S. production continues to thrive and the demand outlook falters.

·     E&P and equipment space; BRS falls following Q3 results that missed estimates and on news of a scrapped deal and deficient internal controls/revenue for all geo-markets declined; PDCE announced 4Q18 production 3.5% above consensus while cutting 2019 capex by $145M to achieve free cash flow, but still growing production 20% y/y; CPE posted a "modestly negative" update according to one analyst as 2019 production guidance looks "soft" relative to capex and activity

 

Financials

·     Financials; ETFC January daily average revenue trades of 282,499 fall 9% from December and 10% from a year earlier/added 48,211 gross new brokerage accounts in January and ended the month with about 4.9M brokerage accounts; in insurance, BHF shares jumped after better results as EPS and revs beat as Q4 reflects strong annuity sales growth; WFC CFO said at a conference the bank was hoping to earn share in mortgage origination; called 2019 CCAR helpful for big fixed-income portfolios

·     Consumer finance and lending; ELLI to be acquired by Thoma Bravo in deal with equity value of about $3.7 billion, with holders to receive $99 per share https://on.mktw.net/2E5R6wh ; ONDK rises after Q4 earnings and Q1 revenue guidance beats consensus estimates/loans of $1.17B, up 5% from Q3 and up 23% from a year earlier/Q4 NIM increased to 30.0% from 29.3% in Q3

·     Asset managers; APAM assets under management, or AUM, as of January 31 totaled $105.4B; BEN preliminary month-end assets under management of $678.3 billion at January 31, 2019, compared to $649.9 billion at December 31, 2018; IVZ preliminary month-end assets under management of $930.6B, an increase of 4.8%. The increase was driven by favorable market returns, foreign exchange, higher money market AUM and reinvested distributions; LAZ prelim AUM of $230.0B at Jan. 31, 2019 increases 7.1% from $214.7B at Dec. 31, 2018; LM reports preliminary AUM $746.7B as of January 31, included net long-term outflows of $2B, driven by net outflows in fixed income of $2.4B, partially offset by alternative and equity inflows of $0.2B each; TROW reports preliminary AUM $1.04T at January 31; WDR assets under management of $70 billion for the month ended January 31, 2019, compared to $65.8 billion on December 31, 2018.

 

Healthcare

·     Biotech movers; GILD shares weak after saying a late-stage, placebo-controlled study designed to evaluate a type of chronic liver disease drug, Selonsertib, did not meet its desired outcome without worsening the patients’ condition (downgraded by two analysts) – VKTX rises in reaction; NKTR shares fell after reporting lower response rates in urothelial cancer patients than initially observed/results suggest a response rate of 38% in the added patients, which is lower than the pre-specified target rate of 45% said one analyst; GSK’s PARP inhibitor Zejula, which is a rival to CLVS Rubraca, produced similar levels of tumor shrinkage and looks "nearly identical" in a Phase 2 study of prostate cancer patients, Piper said

·     Medical equipment and devices; EW agreed to acquire CASM for $2.45 per share ($100M) in cash https://yhoo.it/2UWRSkS ; BRKR shares advanced on in-line earnings and stronger margin growth; NUVA was downgraded to hold at Jefferies

·     Healthcare services and providers; MCK slipped after the FDA issued its first warning letter under the Drug Supply Chain Security Act to McKesson Corp. for violations highlighted by "a concerning tampering incident that involved opioid medications; INGN shares mentioned negatively by another notable short-seller as Citron Research issues its own bearish outlook on Inogen with its $46 (67% downside risk) fair value target (follows Muddy Waters report last week); MOH shares fell despite Q4 EPS and revenue beat and midpoint of guidance above views

 

Industrials & Materials

·     Industrial & Machinery; were among some of the top gainers today amid trade/investors’ hopes ahead of key trade talks this week with the US and China; CAT was among the top gainers in the Dow; FAST was downgraded at KeyBanc; homebuilders surged on the day with big gains in DHI, KBH, LEN, TOL and MTH among them as Zelman & Associates called the setup in homebuilding stocks "attractive" heading into the spring

·     Metals; China has added to its gold reserves again/at the end of January its holdings stood at 59.94m ounces, up from 59.56m a month earlier; U.S. Steel (X) announced the restart of construction on its Tubular Segment Electric Arc Furnace (EAF) project in Fairfield, Alabama and anticipates capex of $215MM for the 1.6MM ton capacity EAF for completion in 2H:20;

·     Materials and Chemicals; CMP posted adjusted 4Q EPS $1.41 below the $1.72 est, driven by weaker salt segment results as snow events were lower yr/yr and occurred mainly in November, generating less demand for deicing salt/FY19 EBITDA guidance of $310M-$350M below $364M est.; LTHM Q4 top/bottom line results short of consensus while Q1 and year guidance also below estimates; HUN sees 2019 Ebitda down 5%-7% and Polyurethanes Ebitda down 8%-12%; FMC Q4 EPS beat by over 30c ahead of the recently announced upward revision to guidance, driven largely by better-than-expected operational results across Ag Solutions as well as lower taxes; TROX has proposed selling all of Cristal’s North American TiO2 business, including its two-plant Ashtabula TiO2 complex, to Ineos Enterprises for $700 million in cash for FTC approval of deal

 

Technology, Media & Telecom

·     Internet; broad gains in the sector with NFLX, GOOGL, AMZN higher; SABR Q4 results beat EPS estimates but missed on revenue/downside FY19 guidance; SHOP guided full-year operating profit guidance to $10M-$20M, below the $55M estimate and sees Q1 operating loss of $14M, below operating profit consensus of $5.9M

·     Semiconductors; Chipmakers, which get a huge chunk of their revenue from China gained and pushed the index higher ahead of trade talks with China and the US; IPGP shares fall as Q4 results beat revenue estimates but missed on EPS, with downside Q1 guidance has revenue from $290M to $320M (est. $324.12M) and EPS ($1.00-$1.20 below est. $1.40); MU rises late afternoon after saying at Goldman Conference it continues to expect stronger 2H vs. Q1

·     Software movers; VRNS shares plunge after several analyst downgraded as FY19 outlook fails to meet consensus expectations (revs of $297M-$305M below $318.1M) while unexpectedly announced that the co will be transitioning from a perpetual license model to a subscription-based model in 2019; EA shares rise after saying more than 25 million players flocked to Apex Legends since its launch last week; TTWO downgraded at BMO Capital; RNG quarterly subscription revenue continuing to accelerate modestly (to +32%), well above the Street on revenue, margins and FCF, and more importantly issued 2019 guidance above expectations; MIME exceeded F3Q estimates as revenue growth accelerated and guidance for F4Q and F20 was above the Street

·     Hardware & Component news; CSCO downgraded from Overweight to Equal-Weight at Morgan Stanley saying the multiple has meaningfully converged with the market over the past 1.5 years, and think it is a good time to step to the sidelines; RDCM was downgraded at Needham after this morning’s Q4 report beat revenue estimates but missed on EPS

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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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