Market Review: September 27, 2017

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Closing Recap
Wednesday, September 27, 17
Equity Market Recap
·      U.S. stocks end higher, led by gains in technology and financials, while defensive staples and materials lagged. Record all-time highs again today for the Russell 2000 Index (SmallCap) posting its biggest one-day return since June (up a 4th day in a row), while the Dow Transports also surge to record levels (up over 8% since August lows). The tax reform proposal today seen as a positive to financials (which could boost earnings), along with the bounce in bond yields. Technology shares were buoyed by a jump in semiconductors following a beat and raise quarter out of Micron, while equipment stocks (KLAC/AMAT) surged as the company boosted capex spending. European stocks jumped to 10-week highs as banks rally. Health care service providers climbed after a GOP-led effort to repeal Obamacare was declared dead once again in the Senate. Note the strength coming into quarter end, with month/quarter end “window dressing” along with short covering giving markets a little extra juice today as well. With today’s gains, the Dow Industrials snapped its 4-day losing streak and avoided its longest losing streak since March. Big moves a day later in bonds, currencies and commodity markets following Fed Chair Yellen comments yesterday, warning the Fed should be wary of tightening policy too gradually while offering little clarity on a December rate hike. Yellen went on to say in Q&A the Fed path is subject to a great deal of uncertainty. Today from the Fed, St. Louis Fed President James Bullard said the Fed has no need to raise interest rates anytime soon because U.S. economic growth will not rise appreciably over 2% this year and inflation will likely remain low. He also said, “Bubble is a strong word. Equity valuations may be stretched,” according to Bullard.

Tax Reform Blueprint
·      A sweeping Republican plan to overhaul the U.S. tax code proposes to sharply reduce tax rates on businesses and many individuals. The plan, which was obtained by the WSJ, calls for a 20% corporate tax rate, down from the current 35%. Other businesses, which pay their tax bills through their owners’ individual tax returns, would get a 25% top rate with unspecified rules that would prevent some wealthy business owners from paying that rate on what’s considered wage income. The individual tax rates would be set at 12%, 25% and 35%, with the option of a fourth higher rate on the highest-income households, collapsing the individual tax structure from seven brackets to three or four. The plan would repeal the estate tax and provide a one-time tax on U.S. companies’ stockpiled foreign earnings.
 
Commodities
·      Oil prices managed to finish higher by 26c, or 0.5%, to settle at $52.14 per barrel following inventory data. U.S. exports rose to a record 1.49M barrels per day according to the EIA. There were headlines that Iraqi Kurds choose independence by vote of 92% in historic referendum. Inventory data mixed as API said weekly supplies unexpectedly fell by -761K barrels while gasoline stockpiles rose 1.5M barrels and distillates dropped by -4.5M barrels; the EIA said this morning, showed a surprise oil drawdown of -1.85M barrels vs. est. build 3.1M, while gasoline rises 1.1M barrels and distillates fall a smaller -814K vs. est. -2.05M
·      Gold prices dropped -$13.90, or 1.1% to settle at $1,287.80 an ounce, marking its lowest settlement since mid-August given the stronger dollar and rising interest rate hike expectations from the Fed. With investors continuing to pile money into riskier assets such as stocks, more defensive and safe haven sectors such as gold and bonds were under pressure.
 
Currencies
·      It was another strong session the U.S. dollar, topping yesterday’s intraday high for the dollar index (DXY), trading above 93.60 level (up 0.7%), its best levels in over a month before paring gains following comments by Fed Chair Yellen yesterday and speed of rate hikes. A combination of Trump tax plan reports and continued reaction to Yellen speech helped provide another leg higher for the dollar with the dollar topping the 113 level against the yen (high of 113.26, first time since mid-July) before paring gains while the euro slipped to 1.1717 (lowest in a month). Emerging market currencies were notably weak as well. The Canadian dollar dropped, with the greenback rising over 0.8% to around 1.2454 after Bank of Canada Governor Poloz cautioned there is no “predetermined path for interest rates” and said the bank will proceed “cautiously”
 
Bond Market
·      Bonds plunge and yields spike as further rotation out of defensive and into riskier assets continues. Fresh record highs for Small Caps and Transports, along with intraday highs for the S&P 500 sent investors unloading bonds, as the yield on the 10-year jumps over 8 bps to top 2.30%, while the shorter term 2-yr rises above 1.47% (fresh 9-year highs); the move in yields joins a global selloff in bonds as investors boost expectations on a December rate rise after Fed chair Janet Yellen reiterated her views yesterday.
 
Economic Data
·      Durable Goods orders jump; U.S. orders for long-lasting goods bounced back in August after suffering their worst monthly drop in nearly three year; Durable-goods orders climbed 1.7% last month, topping the 1% estimate by economists (vs. last month -6.8% report); the increase stemmed mainly from a big batch of orders for commercial aircraft. Bookings surged 45%; Business investment has surged at an 8% annualized rate in the past three months
·      Pending home sales fell (-2.6%) MoM, greater than the expected decline of (-0.5%); pending home sales declined in all 4-regions as the Northeast fell 4.4%, Midwest fell 1.5, the South fell 3.5%, and the West fell 1%
Sector News Breakdown
Consumer
·      Retailers; Dow component NKE reported a quarter largely in-line with expectations, with revenue of $9.1B flat Y/Y and a 9c EPS beat mostly driven by marketing spend down at a double-digit rate Y/Y and tight SG&A control/also warned that weak sales in North America will continue to weigh on results in Q2; consumer discretionary was mostly lower; JAKK enters into toy licensing deal with Disney for Incredibles 2
·      Consumer Staples & Restaurants; sector was among weakest, with PG and KO trailing in the Dow Industrial Average today; Davidson said approval of WBA/RAD deal could be a big positive for ELF as could result in more new distribution; DRI upgraded to outperform at Baird as believe the recent pullback has created a more compelling entry point for investors; CMG cautious mention at BMO Capital saying they remain on the sidelines following survey work on queso order frequency (firm lowers 2017 and 2018 comps and EPS below consensus expectations); SONC the latest to announce a data breach
·      Housing & Building Products; TTS was downgraded to neutral at Piper and cut tgt to $14 based on concerns of another comp/EPS miss for Q3 and potential for a full year guide-down; homebuilder KBH to report earnings tomorrow night
·      Casino, Lodging & Leisure; CWH estimates raised at Credit Suisse based on strong trends observed during the quarter and the potential for incremental demand driven by recent hurricanes; JP Morgan noted the RVA reported that industry RV shipments from manufacturers to dealers rose +25.3% y/y in August to reach the highest level of August shipments on record (shares ofWGO, CWH, THO active on data); SIX added to the S&P 400 index
·      Other movers; in uniforms, CTAS raising EPS guidance by 13-15c as strong internal momentum (3%/7% revenue/EPS beat) more than offsetting hurricane headwinds; in education, RYB 7.8M share IPO priced at $18.50
 
Energy
·      Energy futures active on headlines that Iraqi Kurds choose independence by vote of 92% in historic referendum, as well as mixed inventory reports as API said weekly supplies unexpectedly fell by -761K barrels while gasoline stockpiles rose 1.5M barrels and distillates dropped by -4.5M barrels; the EIA said this morning, showed a surprise oil drawdown of -1.85M barrels vs. est. build 3.1M, while gasoline rises 1.1M barrels and distillates fall a smaller -814K vs. est. -2.05M
·      Solar movers; strength across the solar space, led by gains in SEDG, but all names trade higher (SPWR also rises despite analyst downgrade); SPWR downgraded to underweight at Morgan Stanley the stock’s risk-reward skews negative in light of continued solar market oversupply and potentially significant downside from the pending solar trade case
·      E&P, Oil Equipment and services; HLX downgraded at Piper post ~50% 4-month rally as valuation has expanded to fair value;SLCA to build new facility near Lamesa, Texas and sees facility producing about 2.6m tons annually; WTTR downgraded to sell at Citigroup; SN shares active after reporting strong Catarina well results and reiterating Q4 production guidance; frac sand stocks all came under pressure (EMES, HCLP, FMSA, SLCA); UPL rises midday after saying to work with Fir Tree Partners on value-maximizing strategies
 
Financials
·      Large Cap banks were among the top gainers in the S&P 500 today, with GS, C, MS, BAC, JPM, WFC along with regionals (PNC, KEY, HBAN) due mainly to the price action in bond markets/rising rate expectations and tax reform hopes; RBS was upgraded to buy at Jefferies saying share price performance of RBS and LLOY reflects neither the significance of recent steepening UK yield curves nor base rate hike expectations; GGAL 11M share Secondary priced at $50.00; 52-week highs for PNC, ETFC, AXP, SCHW, TROW, C
·      Insurance; UIHC announced $300-600M of preliminary gross pre-tax Hurricane Harvey and Irma losses; RLI announced that its estimate of pretax losses from Hurricanes Harvey, Irma and Maria will be in the range of $30M-$40M, net of reinsurance; 52-week highs for MET, MMK, AJG
·      Financial technology; Raymond James downgraded INTU to Underperform from Market Perform and firm adjusts FDC and PYPLestimates for this year and next, while slightly lowering 2018 earnings estimate for VNTV; Bernstein said they believe PYPL will likely make a strategic acquisition in the coming months – one of the high-probability upcoming catalysts for the stock that motivated the to upgrade PayPal in early July (said top candidates may include Adyen, Klarna, Square and Stripe)
·      Asset managers and Brokers; Morgan Stanley said of the tax proposal plan that lower Corp tax rate benefits those with the highest rates today in 37-40% range including TROW, WDR, SCHW, WETF, ETFC. However a lower tax rate could impair value of tax assets at ETFC, LM and VRTS
·      REITs; Dow Jones REIT Index down 1% for 7th loss in eight sessions; group broadly lower today given the jump in yields, weighing on interest rate sensitive names; KIM, HCN among top S&P 500 decliners; mall REITS (SPG) also declined
 
Healthcare
·      Quiet day overall for healthcare sector; biotech posted modest gains, in healthcare services and facilities; WBA downgraded to Market Perform at Raymond James while remains outperform rated on CVS and up tgt to $90 saying the ”set-up” for CVS is superior to WBA over the next 6-12 months and that the WBA valuation premium is not warranted
·      Medical equipment and devices; AVGR shares jumped on CE Marking approval for In-Stent Restenosis treatment indication;CTLT 6.4M share Secondary priced at $39.10
·      Health care service providers climb after a GOP-led effort to repeal Obamacare was declared dead once again in the Senate (shares of KND, AMN, HQY, CCRN, AFAM, AMED rise)
 
Industrials & Materials
·      Transports; Transport index with fresh all-time highs today, rising  to highs of 9,859; truckers again jumping with JBHT among top leaders, along with gains in MATX, KEX, and CAR while airlines underperformed; DAL said it would offer free mobile messaging, providing more customers access to free messaging than any other carrier; trucker outperformance remains a function of encouraging freight demand/rate data (after hurricanes)
·      Metals & Mining; in steel sector, WOR shares fall after missing expectations for FQ1 earnings and revenues and sees some automotive softening; gold miners slip again on decline in gold (NEM, ABX, AEM); metals overall were mixed
·      Chemicals; PPG said it sees the net impact from the natural disaster events on 4Q financial results to be negligible or very modest (RBC reduced AXTA and SHW estimates industry-wide raw cost pressures); WLKP 4.5M share Spot Secondary priced at $22.00
 
Technology, Media & Telecom
·      Internet; TWTR will lift its 140-character limit on tweets to 240 characters in an experiment with a small group that may expand to the entire social media platform; in online travel, TRVG downgraded to neutral at JP Morgan and lower estimates on TRIPsaying they are increasingly cautious on metasearch platforms in 2H17 and heading toward ‘18 as financial visibility is limited until they understand more around PCLN’s meta bidding strategy; FB positive mentions by several analysts (tgt raised to $200 at Cowen); OSTK said its subsidiary tZero is joining forces with Argon Group and RenGen to form a digital token exchange; Wells Fargo either initiated or resumed coverage on several Internet names (AMZN, BIDU, EBAY, BABA, GOOGL, FB, NFLX, JD all with outperform ratings – street high tgt on AMZN of $1,400); AMZN announced the all-new Fire TV featuring 4K Ultra HD, High Dynamic Range, and Alexa Voice Remote
·      Semiconductors surge; MU leads the group higher after reported a solid Q1 above consensus and guided Q2 results well above consensus, with a 52% GM, 220 bps above consensus (tgt raised by several analyst, with Needham at Street high $76); AMBApositive mention at Morgan Stanley saying shares could rise to $115 powered by computer vision (CV), a video analytic technology that may be used in autonomous vehicles; AMAT announces $3B stock buyback
·      Semi-equipment names jump to highs after MU capex hike– RBC said believe the continued NAND spending will benefit AMATand LRCX the most. ICHR is likely to be an indirect beneficiary of increasing spend dynamic as AMAT/LRCX account for 90%+ of its sales; MU said it sees FY18 capex $7.5B up from a forecast for 2017 spending of $4.8B-$5.2B; Micron said the spending would be divided equally between DRAM and NAND (TER, MKSI, AMAT, KLAC, LRCX jump)
·      Hardware movers; AAPL shares volatile after the WSJ reported another production snag on iPhone X is over a pair of components dubbed “Romeo and Juliet” (part of facial recognition software); KRNT shares drop after lowers Q3 revenue view to $27.0M-$28.5M from $34.0M-$38.0M as customer delays worsen
·      Software movers; TWLO rebounds from late day weakness Tuesday as KeyBanc (one of several analysts) said after conversations with the Company, they suggest that the new Amazon AWS Pinpoint service is also powered by Twilio; HUBS raised its Q3 guidance at its analyst day; VERI shares dropped midday after cautious comments by Andrew Left of Citron Research
·      Optical and equipment movers; LITE upgraded to buy at MKM Partners as checks tell them that Lumentum’s VCSEL orders and yields have steadily improved in recent weeks and believe orders have increased from ~$200mn to ~$300mn during August and September.
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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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