Monday, September 25, 17
Equity Market Recap
· U.S. stocks end lower amid the biggest selloff in emerging-market assets since May on heightened North Korea-U.S. tensions. Markets were mixed early, but steadily dropped mid-afternoon as North Korea’s foreign minister said President Trump’s comments amount to a declaration of war. Ri Young Ho, speaking in New York said North Korea has the right to shoot down U.S. warplanes as part of its right to self-defense under the United Nations charter. The commentary spooked markets and accelerated selling pressure in stocks while providing a bid to safe haven investments such as bonds, gold and the yen. Today’s losses were highlighted by technology weakness (among the top performing sectors of 2017), with high beta Internet and semiconductors coming under pressure (has been for the last two-weeks). Weakness in AAPL continues (down a 4th straight session) after lackluster commentary pertaining to sales of the latest iPhone 8 and the suppliers uniquely exposed to the iPhone X (which doesn’t ship until November). Small caps underperformed early, with the Russell 2000 index trading to a fresh intraday record high before fading – highest since July. Energy stocks extended gains, as Blomberg noted the S&P energy index is up 16 of the last 18 sessions and has gained 9.5%, the biggest rally over any 18-day period since April of last year. European stocks end little changed despite the euro slide following Germany’s election result. Plenty for the market to chew on this week with expectations of Healthcare Graham/Cassidy health care bill review ongoing (more Republican backlash this weekend), along with the tax reform blueprint expected mid-week.
· On the calendar this week (tax reform): Investors can expect some more details about tax-reform goals this week (expected mid-week) from Washington but will have to wait longer to see legislation that would actually be voted on. The group of House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell, Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, Senate Finance Committee Chairman Orrin Hatch and House Ways and Means Committee Chairman Kevin Brady are expected to release the details. Expectations on Wall Street include some specifics on proposed tax cuts, such as lowering the corporate rate and the rate (President Trump wants down to 15% from current 35%, with early indications it will be around 20%), while cutting the top tax rate for the wealthiest Americans to 35% (from 39.6%).
· Oil prices extended gains, rising for a 4th straight session as WTI crude rose $1.56, or 3.1% to settle at $56.22 per barrel while Brent futures jumped $2.16 to settle at $59.02 per barrel, touching its highest level since July 2015. WTI crude rises to best levels in over 8-months, but the spread between Brent and it the widest in over two years. Energy got another lift today on potential supply disruption is seen arising from the Kurdish independence, while markets continue to hope for additional oil output cuts by OPEC members (though didn’t get such an announcement on its one-day meeting last Friday with non-Opec members). OPEC and 10 producers outside the cartel, including Russia, first agreed late in 2016 to cap their production at around 1.8 million barrels a day lower than peak October 2016 levels.
· Gold prices jumped midday (erasing earlier losses), rising $14.00, or 1.1% to settle at $1,311.50 an ounce, posting its highest finish in more than a week after North Korea’s foreign minister said that President Trump has declared war on his country and that North Korea has the right to shoot down American war planes. The commentary briefly spooked equity markets and boosted safe-haven appeal for defensive assets such as gold, bonds and the yen in currencies.
Currencies & Bonds
· The dollar gained early, extending its advance throughout the session with dollar index (DXY) rising more than 0.5% above 92.60, outperforming the euro, pound and other currencies, but fell against the yen midday. Bitcoin starts the week higher, rising over 8% to above $3,900. Bonds advanced in a flight to safety with the 10-year yield slipping below 2.22% from 2.25% Friday after North Korea said President Trump’s comments was a declaration of war. Recent military tensions between North Korea and the U.S. and its allies has helped turn investors to bonds.
· The S&P has had a positive total return every month this year. If this carries through December, it would be the first year that the benchmark has not had a monthly loss in total return since 1928 when the data started – Bloomberg
Sector News Breakdown
· Retailers; Morgan Stanley downgrades Consumer Discretionary given structural and cyclical challenges; expect further downside amid late cycle conditions; UAA was upgraded to overweight at KeyBanc (downgraded VFC), but UAA was downgraded at Guggenheim; TGT said it will raise minimum wage to $11 per hour; ROST upgraded to overweight at JP Morgan; overall, department stores saw good gains on the day
· Consumer Staples; CL upgraded to overweight at Morgan Stanley as sees a rare opportunity to buy a well-positioned business at a valuation level close to structurally less attractive peers; SODA tgt raised to Street high $90 at Susquehanna; UN agreed to buy Carver Korea, a Seoul-based maker of toners and moisturizers, for $2.7B https://goo.gl/tdNiYY; IRBT mentioned cautiously in Barron’s again noting a “formidable” new rival (SharkNinja)
· Restaurants; YUM shares slipped after Cleveland Research said its Taco Bell and KFC U.S. comps are likely below trend, Pizza Hut U.S. comps are showing a modest improvement; sector was generally weaker with MCD lower though CMG rising midday
· Housing & Building Products; in homebuilders, DHI said sees 4Q backlog conversion rate about 85%, down from prior view of 88%-90%, citing delays caused by recent hurricanes for the change in forecast
· Casino, Lodging & Leisure; in leisure, SIX cautious mention in Barron’s saying upside looks limited; cruise line estimates (RCL, CCL, NCLH) lowered at Bernstein after impact from hurricanes
· Auto movers; GM upgraded to buy at Deutsche Bank and raise tgt to $51 saying its autonomous vehicles will be ready for commercial deployment much sooner than widely expected; GPC agrees to buy Alliance Automotive Group for about $2Bhttps://goo.gl/iHKxd1 ; WSJ reported that China eyeing rule change that could aid TSLA; KMX downgraded at Goldman Sachs; auto suppliers positive at BMO Capital, raising targets on ALV, BWA, GM, DLPH, VC as view bulk of group undervalued despite strong performance
· Other consumer related names; in education, EDU upgraded to buy at Bank America and raise tgt to $105 from $85 as more positive on the after-class tutoring market in China; in guns, AOBC upgraded to outperform at Wedbush saying despite negative checks and surveys, company showing no signs of going away
· Sector a leader! Blomberg noted the S&P energy index is up 16 of the last 18 sessions and has gained 9.5%, the biggest rally over any 18-day period since April of last year; Brent oil prices top best levels since July of 2015 earlier today – money rotating out of tech and into energy.
· Oil drillers; UBS upgraded offshore drilling stocks (RIG, DO, ESV, NE, RDC) to buy from neutral amid early signs of a slow recovery; said the sector has reached bottom in offshore utilization for floaters and jack-ups; demand will slowly increase in 2018, with “greater demand growth not until 2019-2020. Bloomberg reported RDC is in talks to acquire Maersk’s drilling business, which have attracted interest from other offshore drilling companies and other potential buyers may still emerge, the people said https://goo.gl/9kDwcn
· E&P and equipment names; NBL boosted its Q3 sales volume guidance to 352K-358K boe/day, a 10K increase at the midpoint of expectations, which raises its full-year sales volume outlook to 342K-352K boe/day; sand frac stocks (FMSA, HCLP, EMES) were higher
· Large Cap banks fall; banks getting hit with decline in bond yields – JPM, GS, C, BAC, MS all down over 1% midday as broader markets drop; group awaits tax reform blueprint this week out of Washington; earnings for sector kick off week of October 9th
· Financial services, payments and finance; TSS announced after the close on Sept. 22 that President and COO Pamela Joseph will be resigning, including her board position, effective Sept. 30; CATM shares fell after saying a plan by Australia’s 4 largest banks to remove all charges on ATM transactions may hurt its revenues in the near term
· REITs; OFC upgraded to buy at Jefferies due to our expectation that higher defense spending growth creates significant earnings tailwinds for OFC’s portfolio of office buildings near military bases; Evercore/ISI said recent volatility prompts a handful of ratings changes as they upgraded AVB, ESS, HCP and downgrading PLD; note the RMZ was down 2.3% last week, underperforming the S&P 500 and Russell 2000 for the second straight week
· Large Cap Pharma; PFE said it will spin off four experimental drugs that it had decided to shelve into a new company, called SpringWorks Therapeutics, to give them a better chance to get developed; AGN announces a $2B stock buyback; BMY and INFIexpand collaboration evaluating IPI-549 and Opdivo to include patients with triple negative breast cancer (TNBC) who have not been previously exposed to anti therapy; ABBV downgraded to neutral at UBS after run in shares
· Healthcare bill: Republican Sen. Rand Paul said the “primary obstacle” to his support for Graham-Cassidy is that it doesn’t truly repeal Obamacare and still spends more than $1 trillion, according to document provided by his office. “Only a significant reassessment of this trillion-dollar spending regime would get my support,” Paul said (one of a few key Republicans who oppose the current bill) – managed care, facilities levered to bill passage
· Biotech movers; ICPT shares volatile as its CEO defended the company’s Ocaliva drug during a conference call to explain why there appeared to be discrepancies on the number of deaths and adverse events the company reported and what the FDA’s safety communication later disclosed; AMGN said Hurricane Maria has not ‘significantly’ impacted Puerto Rico manufacturing facility; SRPT active ahead of July 24 share sale lock-up expiration September 23, and the FDA AdCom for non-overlapping drug ataluren on September 28
· Lab companies; DGX and LH shares under pressure following the preliminary 2018 CLFS rates released Friday, which came in steeper than anticipated and will likely make it more difficult for the companies to achieve previously communicated 2020 targets. The U.S. released worse-than-expected draft Medicare payment rates, known as Protecting Access to Medicare Act (PAMA). Piper said PAMA was worse than expected for lab names as LH & DGX could see a ~8% headwind to Medicare revenue in 2018, 2019 and 2020/PAMA positive for GHDX, VCYT, CDNA
· Healthcare services and facilities; HIIQ said it reached “general understanding on a path forward” that would allow HIIQ to submit new TPA license application; currently working on specific terms; STAA upgraded to buy at Canaccord with $15 target
Industrials & Materials
· Industrial & Machinery; AZZ falls as cuts FY18 EPS view to $1.80-$2.30 from $2.60-$3.10 (est. $2.62) and lowers FY18 revenue guidance to $825M-$885M from $880M-$950M (est. $873.13M); GE agreed to sell its industrial-solutions business to Switzerland’s ABB Ltd., for $2.6B https://goo.gl/wiDbCr ; in Transports; 52-week highs early rail companies NSC, UNP; sector had come in a 3-day win streak with the DJ Transport index touching a high of 9,725 before fading; NAV and Volkswagen AG’s Truck and Bus will collaborate to launch an electric medium duty truck in North America by late 2019, Reuters reported
Technology, Media & Telecom
· Internet; early broad weakness in Internet giants, with FB, NFLX, GOOGL lower; in online travel, TRIP shares dropped after Raymond James said until their monetization trends improve, its shares are likely to remain range-bound (Guggenheim also pulled back estimates in TRIP); SNAP estimates trimmed at JP Morgan given a slower monetization ramp, bringing down 2017 & 2018 revenue estimates 10% & 15% (cut tgt to $14)
· Apple Inc. (AAPL); its iPhone 8 went on sale Sept. 22, with the iPhone X not expected in stores until Nov. 3. Early reports suggest opening weekend sales of the iPhone 8 were weak vs. prior refreshes, with most models in-stock and store lines reportedly short. Customers may be delaying purchases until the iPhone X hits stores. Digitimes reported that iPhone X suppliers have been told to slow down deliveries of components.
· Semiconductors; semi index (SOX) under pressure early, with the SOX down over 1% led by AAPL parts suppliers on weaker iPhone 8 adoption fears (CRUS, SWKS, QRVO); TXN reiterate buy at Citi calling it now cheap” relative to peers despite higher earnings growth and maintain $97 tgt; AMAT holding an analyst meeting on 9/27
· Hardware & Storage; BOX upgraded to Outperform at Raymond James as believe the risk/reward for shares looks compelling at current levels.
· Media & Telecom; OUT said it was recommended to be awarded a transit advertising concession agreement from the New York MTA, subject to approval from the MTA board; DIS has threatened to pull its programming from ATUS, if the two parties cannot reach a deal before the end of the month; TMUS and Sprint (S) are entering due diligence in a stock-for-stock deal that is expected to make Deutsche Telekom the majority owner, CNBC reported https://goo.gl/Ed5izD
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.