Market Review: September 22, 2017

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Closing Recap
Friday, September 22, 17
Equity Market Recap
·      Stocks remain very resilient, managing to trade mixed late day and not far off record levels reached on Wednesday despite increased rhetoric between North Korea and the U.S. Defensive assets such as gold, bonds and the yen saw early strength as North Korea threatened to test a hydrogen bomb over the Pacific Ocean, but those assets pared gains late. Financial dipped after a week of gains on expectations for another Fed rate hike this year and three next year, while tech was steady despite Apple falling again on iPhone 8 demand concerns (AAPL off over 4% this week). Energy stocks were strong, while defense stocks traded to 52-week highs on increased North Korea tensions. The big stories of the week were the Fed, as well as the damage and devastation to Mexico, Puerto Rico and the Caribbean following more hurricanes/earthquakes, but there are several upcoming catalysts that could certainly move the needle for stocks.
·      Healthcare related stocks such as hospitals, managed care, and service related names jumped late day after Sen. John McCain said Friday he cannot vote for the Senate bill to repeal major parts of Obamacare, which severely dims its hopes for passage. McCain was one of the critical swing votes its supporters were counting on. The sector had been a laggard the last few days on hopes the Senate pass Graham-Cassidy bill by the 9/30 reconciliation deadline.
·      Upcoming macro calendar – key items to watch the next three weeks include: the German elections this Sunday, the highly anticipated publication of the Republican tax blueprint (expected mid-week next week), Healthcare bill as markets wait to see if the Senate pass Graham-Cassidy bill by the 9/30 reconciliation deadline, ECB meeting minutes next Thursday, monthly jobs report next Friday and the Q3 earnings start 10/12 with banks.
·      Dallas Fed hawk Kaplan is open minded about one more hike this year in December, but he has not made a decision yet. He sees structural headwinds, including technology holding inflation down. He also sees a shortage of construction workers around Houston leading to a “healthy” discussion of immigration policy, though he anticipates a snapback in growth from Harvey. Kaplan views net negative growth in due to workforce demographics, with immigration need to fill the gap. Risk from China remains a “danger spot” in terms of rising debt levels there.
·      WTI crude oil futures end slightly higher, rising 11c to settle at $50.66 per barrel following headlines from various OPEC/non-members this morning in a meeting about output. Brent Crude touches 6-month high of $56.89 per barrel (best since early March), posting its fourth consecutive weekly gain. Kuwait oil minister said there was no reason for deeper OPEC output cuts at meeting today. Russia signaled that it would be willing to prolong the production cuts it agreed with OPEC beyond Q1 of next year if needed, while also making clear its commitment to the deal wasn’t open ended. The Baker Hughes rig data showed a decline of -5 oil rigs.
·      Gold futures were flat Friday, rising a modest 0.2% to $1,294.80 an ounce, off earlier highs above $1,300, after posted big losses earlier in the week (including a monthly low on Thursday). Data showing weakness in the manufacturing sector conflicted with the Federal Reserve’s rosy assessment of the economy on Wednesday. Gold prices fell on Wednesday and Thursday after the Fed said it will begin shrinking its $4.5 trillion portfolio in October by allowing $10 billion in bonds to mature without replacing them, and saw 4-rate hikes by the end of next year. For the week, gold declined more than 2% while fell by around 4c, or 0.2%, to close at $16.98, on booking a weekly drop of 4%, its steepest such fall since July.
·      The U.S. dollar pared losses today, but ended lower, down a second session after jumping Wednesday following the FOMC announcement for 4-more rate hikes by end of 2018 and normalization of balance sheet starting in October. The dollar fells against the yen (to 112) in a flight to safety trade after North Korea increased tensions. The euro touched highs of 1.2004 before sliding throughout the day to end little changed around 1.195. The British Pound falls after PM Theresa May said that the U.K. is prepared to plug the EU’s budget black hole during a transitional period that would probably be about two years after the country’s withdrawal from the bloc in 2019. This would equate to about 20 billion euros ($24 billion).
Bond Market
·      Treasury markets rebounded, sending yields lower after North Korea threatened to test a hydrogen bomb in the Pacific Ocean, escalating and boosting demand for assets seen as safe. However, the shorter term 2-yr holding above 1.43%, best levels since 2009. The 10-yr yield slipped slightly on the day to around 2.26% a week after rising more than 14 bps.
Sector News Breakdown
·      Retailers; FINL reported in-line Q2 results from recently lowered outlook on 8/28/maintains outlook for next quarter and year; move comes ahead of NKE results this upcoming Tuesday; TIF was downgrade to neutral at Goldman Sachs and cut tgt to $94 from $106 saying the company’s high-end categories, including engagement, wedding and solitaire jewelry, decelerated in the last two quarters; WMT is testing a program that will deliver items, not just to your doorstep, but into your house, partnering with August Home
·      Auto movers; auto retailer KMX Q2 EPS and revs topped estimates while 2Q comp. stores used unit sales rose 5.3%, beating Consensus Metrix est. of +5.01% even though its 6 stores in Houston were closed for most of last week (PAG, SAH, LAD, GPIwere active); TSLA shares fell a 4th straight day, longest such streak since early March (and down over 6% this week alone) – shares on Monday closed at a record $385, supplanting a previous all-time close of $383.45 in June…shares were initiated coverage at Jefferies on Tuesday with an underperform and $240 tgt
·      Consumer Staples; group got slammed yesterday, led by declines in packaged food names (GIS, CPB, KHC); MCD raises quarterly dividend; CAG to buy Angie’s Artisan treats; PETZ shares surge in second day of trading after IPO of PETZ of 1.33M shares at $4.25 yesterday
·      Housing & Building Products; in home furnishings, LEG upgraded to buy at SunTrust citing recent stock pressure, good dividend yield, and has seen content wins in mattresses; MHK was downgraded to neutral at Cleveland Research; IRBT shares fall below the 200 day MA support of 77.40 (first time below 200 day this year)
·      Casino, Lodging & Leisure; in boats, SunTrust noted retail powerboat registrations gained 4% in August, bringing YTD growth to 5% (BC/HZO/MBUU/MCFT);
·      Energy stocks among the top sector gainers today as oil posts its third weekly gain. OPEC and its allies indicated at a meeting today in Vienna that they’ll wait a bit longer to see if further action is required in their bid to clear a global oil glut
·      Solar movers; sector volatile after the ITC determined that U.S. solar manufacturers are being harmed by imports, advancing a trade complaint to President Donald Trump to decide if tariffs or quotas should be imposed. After the 4-0 vote ITC is next set to deliver its recommendations to address import surge to Trump by Nov. 13; Trump will decide remedy after that. The decision threatens to upend $29 billion U.S. solar industry, most of which opposes the effort; they argue that inexpensive imports have driven a boom in domestic solar projects. Case brought by Georgia-based Suniva Inc., which is seeking import duties of 40 cents a watt for solar cells, and a floor price of 78 cents a watt for panels – Bloomberg (FSLR, SPWR, JASO, CSIQ among movers)
·      Baker Hughes U.S. rig count shows the total rig count fell -1 rigs to 935, with oil rigs down -5 to 744, gas rigs up +4 to 190, and miscellaneous rigs unchanged at 1
·      MLPs; PSXP said it has reached an agreement to acquire assets from PSX in a deal worth $2.4 billion including debt. Phillips 66 Partners is a master limited partnership that was set up by Phillips 66 to own, operate and acquire crude oil and other energy assets
·      Large Cap banks fall for the first time this week in a bout of profit taking after yields slipped on geopolitical fears; shares of bond insurers AGO, MBI and AMBC slumped yesterday as investors’ concerns about the impact of Hurricane Maria – on top of the impact of Hurricane Irma – on Puerto Rico weighed on the stocks given the Monolines’ insured exposures to the its debt ;EFX upgraded to outperform at Wells Fargo after falling over 30% on data hack breach; the WSJ reported that U.S. officials were considering whether to remove federal oversight of AIG though no decision had yet been made.
·      REITs; Data REITs initiated at William Blair as believe hyperscale cloud deployment, enterprise IT outsourcing, content distribution and future IoT deployments will provide long term demand drivers for the industry (OP rated on CONE and COR, MP on DLR); healthcare REITS VTR and HCP downgraded to neutral at Bank America citing valuation and senior housing pressures;PEB upgraded to buy at BTIG saying excess supply should remain a headwind in 2018, but supply should ease in 2019
·      Large Cap Pharma; Health insurers initially fell as the Brookings Institution said at least 21M people would lose health care coverage under the latest GOP bill to replace the Affordable Care Act (UNH, AET, CNC, HUM)- sector bounced sharply late afternoon after Senator McCain said “I cannot in good conscience vote for the Graham-Cassidy proposal”
·      EXEL downgraded at Leerink and tgt cut to $28 saying valuation adequately reflects Cabometyx commercial potential in kidney cancer but also implies additional value from label extensions and liver cancer; AZN was upgraded to outperform at Bernstein saying that the outlook of its current products has improved, leaving it well-positioned to grow;
·      Biotech movers; VSAR the story of the day, plunging over 80% after it announced that the VELOCITY Phase 3 clinical trial of somavaratan did not meet its primary endpoint of non-inferiority; shares of ASND soared as VSAR’s somavaratan is no longer seen as a threat to Ascendis competing product, TransCon growth hormone (GH)/Wedbush raised ASND tgt to $65 from $36;ICPT falls to fresh 52-week lows following recent FDA communication about Ocaliva safety issues noted in the community (Morgan Stanley cut tgt to street low $50 from $75); JUNO 6.1M share Secondary priced at $41.00
·      Medical devices, equipment and services; DVA shares dropped late morning after a Southern Investigative Reporting Foundation (SIRF) report accused the company of having its finances “massively levered to an opaque non-profit, the American Kidney Fund, that may provide up to half of its operating profits.”
Industrials & Materials
·      Industrials & Machinery; 52-week highs in the S&P 500 for CAT, HON, LMT, BA, NOC, RTN in industrial/defense space; GE has neared the sale of its industrial solutions unit to ABB Ltd for $2.5B-$3B, Bloomberg reported on Friday. ;BA tgt raised to $300 at Jefferies today following the company’s analyst day earlier this week
·      Transports; Transport index little changed today, looking to make it a third straight day of gains; led by airlines with ALK and AAL both up over 1% early, while MATX gives back much its gains from yesterday; AAL was upgraded to overweight and $65 target at Barclay’s; FDX shares remain higher following its earlier quarterly miss/lower guidance this week
·      Metals & Mining; Steel sector active as Cowen downgraded X to underperform and cut its price target to $20 based on expectations iron ore and U.S. HRC prices are heading lower, while cut MT to market perform (tgt to $27 from $32) based on expectations iron ore and global steel prices are heading lower; also Commerce Secretary Wilbur Ross said today the steel tariff bill (232) has been postponed until after the tax bill; AA was downgraded at Berenberg noting shares are up 43% over the last 6-months and recommends taking profits; TAHO announced a 6% increase in its 2017 gold output guidance and also announced 7% and 8% reductions in its 2017 total cash cost (TCC) and all-in sustaining cost (AISC) guidance; gold miners rebound (ABX, AEM);
·      Chemicals; CMP cuts earnings view on Goderich mine output constraints/ lowers FY17 EPS view to $2.50-$2.80 from $3.00-$3.50
·      Paper and Forest stocks; the containerboard space are moving lower after IP announced plans to invest $300M to convert its No. 15 paper machine at the Riverdale Mill in Selma, Ala. from uncoated freesheet to high quality whitetop linerboard and containerboard. The conversion is targeted to be completed by mid-year 2019 and will add 450,000 tons of annual capacity, with flexibility to shift between containerboard products (WRK, KS, PKG shares lower)
Technology, Media & Telecom
·      Internet; GRUB shares slipped after AMZN announced a partnership with Olo, which could let it press deep into GrubHub’s delivery market space; CVNA initiated sell at B Riley saying strategy of below-market forward pricing to achieve scale and expand margins is risky and unproven – while firm initiates CARS with buy on accelerating revenue; SECO 8.5M share IPO priced at $13.00; Uber London Ltd.’s license to operate won’t be renewed, London’s transportation regulator said; Wayfair (W) shares fell on a  negative Citron tweet (Andrew Left)
·      Semiconductors; TXN raises dividend 24% to 62c from 50c and adds to repurchase program; IDTI shares active after Craig Hallum confirmed through their proprietary teardown that IDTI is not in the new Belkin or Mophie WC pads sold as an iPhone 8/8+; RMBS downgraded at JP Morgan
·      Optical stocks/comm equipment OCLR and LITE positive mention by B Riley saying from a demand perspective, checks indicate that that China remains soft while NA orders are trending slightly higher, especially for ROADMs; ANET loses bid for stay of import ban in CSCO patent fight
·      Hardware and Software; AAPL shares make it a third day of weakness as iPhone 8 preorders were substantially lower than previous model releases and connectivity issues with the Apple Watch Series 3 came to light (shares of AAPL fell over 4% this week alone as sales of new iPhone begin today); HPE plans to cut about 10% of its staff, or 5,000 workers, Bloomberg News reported; MB jumps early on upgrade to overweight at KeyBanc after recent pullback in shares
·      Media & Telecom; TMUS is close to agreeing tentative terms on a deal to merge with Sprint (S) according to Reuters; More than 95% of Puerto Rico’s wireless cell sites are currently out of service, the FCC said Thursday.
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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