Wednesday, September 20, 17
Equity Market Recap
· The Dow Industrials manage to close higher for an 8th straight session, its 6th straight record close, and its 42nd record close of 2017 on Fed day while the S&P set a new record as well. As expected, the U.S. Federal Reserve left interest rates unchanged but signaled it still expects one more increase by the end of the year despite recent weak inflation readings. The Fed (also as expected), said it would begin in October to reduce its approximately $4.5trillion in holdings of U.S. Treasury bonds and MBS by initially cutting up to $10 billion each month. The moves were in-line with market expectations, but the Fed’s interest rate projections, known as the dot plot, suggested a rate hike in December and three more in 2018, slightly more than some saw. The S&P 500 initially slipped after the FOMC headlines, led by non-financial related stock, with technology (as AAPL weighed on iPhone preorder slow demand story – more below), health-care and consumer-related sectors falling, along with the interest rate sensitive sectors such as gold stocks and utilities (5-week low) coming under pressure. The dollar jumped across the board, rising to a 2-week high, while gold prices and bonds dropped. Equities proceeded to regain momentum, bouncing well off the session lows, though tech underperformed. Equity markets came into the day at record highs for the S&P, Dow and NASDAQ.
· Outside of the FOMC, lots of potential market moving catalysts with tax reform blueprint set for release next week, Hurricane Maria made landfall on Puerto Rico as a powerful Category 4 storm, bringing heavy rain and winds of up to 155 MPH and causing great damage, the Graham/Cassidy repeal and replace bill is getting attention and is within a couple of votes of passage (affecting the healthcare sector) and a Bank of Japan policy meeting this week as well. Housing data was softer than expected this morning (existing home sales), while several stocks move on earnings (BBBY, GIS falls on missed results, ADBE falls on bookings comments and FDX reverses losses despite miss and lower outlook).
· The Federal Reserve leaves benchmark interest rate unchanged at 1%-1.25% and said will start balance-sheet runoff in October at $10B; Four fed officials see no more 2017 hikes, unchanged from June, while eleven fed officials see one more 2017 hike vs. eight in June. The median “dots” are unchanged for this year and next, but shifted modestly lower for 2019 to 2.7% vs. 2.9% prior. Fed expects 7 more rate hikes by end of 2020. The median of FOMC participants now expects to hit the 2% inflation goal in 2019, both core PCE inflation and PCE inflation (bit later than in June). Also of note, there were no dissenting voters.
· Oil prices rise as November WTI crude added 79c, or 1.6%, to settle at $50.69 per barrel while Oct. WTI gained 93c, or 1.9%, to finish at $50.41 per barrel on the contract’s expiration day. WTI crude moved back to 4-month highs, topping the $50 per barrel mark after inventory data. The API said U.S. crude supplies climbed by 1.4M barrels, while gasoline stockpiles dropped -5.1M barrels, distillates fell by -6.1M barrels. The EIA showed a build of 4.59M barrels vs. est. 3.9M build, gasoline draw of -2.125M (in-line) and distillates fell a greater -5.69M barrel vs. est. -1.95M
· Gold prices settled on the day prior to the FOMC rate and policy decision, rising $5.80, or 0.4% to settle at $1,316.40 an ounce (first rise in 4-sessions)…but prices slid in electronic trading after the FOMC news that they see another rate hike this year and said it will taper its $4.5 trillion balance sheet by $10 billion per month, the first reduction in nine years.
· The dollar index (DXY) touched its best level in a week after the Fed left its key interest rate unchanged, but confirmed the start of the reduction its $4.5 trillion balance sheet in the amount of $10 billion per month, in line with analyst expectations. Meanwhile, the Fed’s interest-rate projections, or dot plots, suggest another rate hike in 2017, followed by three additional raises in 2018. The news lifted the dollar vs. most counterparts (the British Pound remains strong). Dollar index (DXY) rises to best levels since late last week; dollar rose vs. Canadian dollar to two week lows 1.2368; greenback rises above 112 against the Japanese yen; the euro fell over 1% from highs over 1.20 earlier; peso fell again
· Bonds fell as yields jumped across the spectrum following the Fed news about future rate hikes, inflation and normalization of the balance sheet; the 10-year yield rises 4 bps since FOMC headlines to above 2.28%, highest in about a month, while the 2-year Treasury yield rises to 1.43%, highest levels since the recession
· Existing-Home Sales for August fell (-1.7%) to 5.35M rate (down a 4th time in last 5-months), and below estimate for up 0.2% to 5.45M; July was unrevised at 5.44M; said there was 4.2 months’ supply in August vs. 4.2 in July and inventory fell 2.1% to 1.88M homes; the median home price rose 5.6% from last year to $253,500
· Last week, the S&P 500 passed an impressive milestone, becoming the second strongest bull market since the end of World War II in 1945. The S&P 500 achieved the landmark on Sept. 13 and is now up nearly 270% over its lifetime, beating the 267% gain from June 1949 to August 1956, Detrick said. Only the October 1990 to March 2000 bull market, which produced a gain of 417%, surpasses the current run – Marketwatch.com
Sector News Breakdown
· Retailers; Cowen downgraded LB to market perform as risk to its comparable sales growth and margins; HIBB and SCVLupgraded to positive at Susquehanna saying stores in Florida, Georgia, Louisiana, and Texas will benefit from recovery efforts as they did in 2005 post-Hurricane Katrina
· Consumer Staples; food related stocks fall after GIS reported a 6c EPS miss on light revs and margins/results disappointed with org sales -4% missing consensus -2.9%, driven by pronounced weakness in Asia & Latam (K, CAG, CPB were active); POST was upgraded to outperform at BMO Capital
· Housing & Building Products; in home furnishings, BBBY shares fell as reported 2Q sales and EPS well below expectations, with continued competitive pressure and growing expenses (weighed on shares of LZB, RH, WSM, PIR early); building product stocks (USG, EXP) advanced on rebuilding expectations given destruction of recent hurricanes and National Gypsum announced Jan. 2018 price increases for wallboard
· Casino, Lodging & Leisure; in gaming, IGT was upgraded to buy at Bank America believe IGT’s stable and recurring business warrants a higher multiple (also raised tgt on SGMS); in movie theatres, IMAX China was upgraded at Goldman Sachs saying the company is poised to benefit from continued recovery of the movie industry;
· Other services; ATGE shares fell yesterday, Piper today said Hurricane activity will likely impact ATGE’s near-term revenues and earnings, but believe these challenges are transitory; rental home companies get SEC subpoena (AMH, SFR, INVH) as part of a probe into whether bonds backed by single-family rental houses used inflated property assessments, Bloomberg reported
· Inventory data bullish for distillates, while crude was mixed. The American Petroleum Institute (API) reported that U.S. crude supplies climbed by 1.4 million barrels for the week ended Sept. 15; also showed that gasoline stockpiles dropped 5.1 million barrels, and inventories of distillates fell by 6.1 million barrels. The EIA showed a build of 4.59M barrels vs. est. 3.9M build, gasoline draw of -2.125M (in-line) and distillates fell a greater -5.69M barrels vs. est. -1.95M
· E&P; Baird lowers 3Q17 volumetric forecasts for EOG and SM, expecting investors to look through these short-term curtailments after Hurricanes; SWN was upgraded to peer perform at Wolfe Research and raise tgt to $7 and downgraded RRClargely on valuation; frac sand stocks outperformed (FMSA, EMES, HCLP)
· Utility prices dumped after the FOMC meeting, with most names dropping and the UTY index down over 1% as the group seen as interest rate sensitive
· Large Cap banks outperformed this afternoon as the FOMC forecasts continue to signal another 2017 rate increase, with 3 more in 2018, and as Fed says hurricanes are unlikely to alter economy’s course medium term; SBNY downgraded to neutral at Wedbush owing to our expectation for significant pressure on the company’s net interest margin in coming quarters as well as the competitive environment negatively impacting loan growth
· Insurance; PGR was upgraded to neutral at Credit Suisse after announcement of August results that revealed a much lower than expected Harvey loss (~$230M vs. est. $550M);
· Lenders, services and finance; The Consumer Financial Protection Bureau (CFPB) announced today that it took action against the National Collegiate Student Loan Trusts (NCSLT) and their debt collector, Transworld Systems, for illegal student loan debt collection lawsuits (shares of SLM, NAVI were active)
· Healthcare Bill leading the sector the last few days: The Graham/Cassidy repeal and replace bill is getting attention and is within a couple of votes of passage…shares of hospitals, managed care and services were under pressure yesterday. A spokesman for Senate Majority Leader Mitch McConnell said he intends to consider the Graham-Cassidy healthcare bill on the Senate floor next week, according to The Wall Street Journal. This, though, does not guarantee a vote will be held on the Obamacare replacement bill
· Large Cap Pharma; PFE upgraded to overweight at Morgan Stanley and up tgt to $39 as believe shares are poised to outperform given global rollout of #1 growth driver Ibrance, the stock’s favorable risk-reward, and M&A optionality; AGNdowngraded to equal-weight at Morgan Stanley and cut tgt to $228 from $284 as re-assessed model, which drove lower margin assumptions and new ’20e EPS 6% below consensus; JNJ was downgraded to sell at Goldman Sachs as its long-term growth outlook lags large-cap Pharma peers; GEMP rises as plans to advance high cholesterol fighter gemcabene into Phase III development in 2018; NBRV 9.41M share Secondary priced at $8.50
· Biotech movers; ALNY shares jump after reported (with partner SNY) phase III clinical trial of RNAi therapeutic patisiran in patients with hereditary ATTR amyloidosis with polyneuropathy met its primary endpoint and all secondary endpoints; shares ofIONS declined in reaction to positive ALNY results as develops rival treatment inotersen; NKTR announced that new data across its wholly-owned immuno-oncology (I-O) portfolio will be presented at the upcoming Society for Immunotherapy of Cancer Annual Meeting; KPTI rises on positive results from the Phase II portion of its Phase 2/3 clinical trial, SEAL, assessing selinexor (KPT-330); CELC 2.4M share IPO priced at $9.50
· Healthcare services and facilities; There was broad based weakness in HC services names yesterday following news that GOP Senators were gaining traction in efforts to repeal ACA – Jefferies said today they think the stock reaction as overdone, especially for ACHC and the home nursing names as don’t believe a rebalancing of Medicaid funds would have a negative impact on mental health services; Craig Hallum said elimination of tax penalties would benefit HIIQ; EVH defended at SunTrust after shares sold off ~12% since 9/8, likely reacting to the ACA replacement bill that would reduce Medicaid spending by the Federal government and, by extension, EVH’s; late day, Bloomberg reported, citing Axios, that AMZN is talking with some middle-market pharmacy benefit managers, citing analysts at Leerink Partners who spoke with pharmacy executives (shares of ESRX, CAH, ABC, MCK were all active, while CVS shares fell)
Industrials & Materials
· Industrials & Machinery; group has been among strongest sectors, with several names (CAT) at 52-week highs; JP Morgan making some ratings changes in sector, downgrading MMM to underweight as sees the company’s relative organic growth weakening further in 2018, and also cut IR to neutral citing best risk/reward elsewhere in sector; JP Morgan upgraded ROP to overweight with $275 tgt as expects the company’s relative organic growth to remain strong and upgraded DOV to overweight saying recent catalysts not factored into stock
· Airlines; Raymond James revising EPS forecasts for U.S. airlines primarily to reflect pricing weakness in select markets, the impact from hurricanes Harvey and Irma, and the recent run-up in jet fuel prices – firm upgraded AAL and LUV to Outperform and downgraded UAL to Market Perform as believe it will continue to underperform its large airline peers in the medium term as the execution on improving its relative profitability is likely to take longer than anticipated
· Transports; FDX reported Q1 results well below expectations and F2018 adjusted EPS guidance reduced given impact from previously disclosed cyber-attack at TNT (though company long-term Express/TNT profit improvement target was reaffirmed);BSTI 45M share IPO priced at $10.00; Transports outperform rising over 1%, led by gains in CAR, FDX, AAL, MATX and NSC
· Metals & Mining; aluminum futures hit five-year high on reports Chinalco (ACH) was cutting production two months before official winter restrictions begin and would soon trim stocks of available metal (ACH, AA, CENX active); in steel sector, STLDguided Q3 EPS 63c-67 with items, below estimates of 71c as profitability from steel operations is expected to be similar to sequential Q2 results (recall last week NUE cut views) – analysts defend with Longbow saying steel prices likely to move higher in Q4; CRS to increase base prices 3% – 8% on new non-contract orders across all stainless steel product forms
· Aerospace & Defense; TDG downgraded to hold at Jefferies and cut tgt to $280 saying believe the company is nearing the end of one of its capital allocation cycles, and believe M&A announcements will be limited in the NT. Jefferies also with business jet survey which indicates a 5% YoY decrease in the total number of used aircraft for sale in all business jet categories.
Technology, Media & Telecom
· Semiconductors; semi-index moves to lows, down -1.75% after touching fresh 17-year high yesterday for the SOX index – group fall led by decline in AAPL suppliers on the reports of iPhone 8 pre-sales are apparently tracking a bit light – suppliers such asSWKS, QRVO down over 4%, AVGO, CAVM, CRUS down over 3%
· Software movers; ADBE shares fall after reported better-than-expected Q3 results on rev growth 26% YoY/guidance in-line but failed to achieve its F3Q17 bookings target for the Adobe Experience Cloud and, consequently, would no longer achieve its full-year goal of 30% bookings growth for the Adobe Marketing Cloud; MSFT boosts dividend by 7%; TNTR double downgrade to underperform from outperform at Raymond James
· Hardware movers; AAPL shares fell after a report from Rosenblatt Securities saying research suggests that iPhone 8 preorders are substantially lower than iPhone 7 and iPhone 6 levels/also AAPL reportedly admitted there are issues with connectivity of its new Apple Watch Series 3, according to reports; Dell EMC and partners GD and MSFT were awarded a $1 billion five-year U.S. Air Force contract to implement a Cloud Hosted Enterprise Services program; Toshiba has selected a Bain Capital-led group, which includes SK Hynix, AAPL, Dell, Kingston Technology and STX, to purchase its memory unit for $22B https://goo.gl/t6avQK(shares of WDC fell)
· Comm equipment and services; ANET upgraded to overweight at Morgan Stanley and raised tgt to $210 saying eats “humble pie” after seeing shares nearly double since it went to Equal Weight nine months ago
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.