Tuesday, October 3, 17
Equity Market Recap
· It was another record setting day on Wall Street with the Dow, S&P 500, Nasdaq Comp and Dow Transports all touching record highs, and with a late day push, the Russell 2000 managed to increase its winning streak to 8-days as well. Today’s gains were led by airlines following a monthly update from Delta while autos jumped on stronger September sales data (helped by hurricanes). Will the reflation trade that has pushed industrials, Small Caps and financials higher ever take a break? The dollar took a break after rising to a one-month high yesterday, while oil slipped a second session (from 8-month highs) ahead of inventory data. Politico reported that current Fed Governor Powell is now the frontrunner to replace Janet Yellen as the FOMC chair in a decision could come the next two-weeks (Kevin Warsh is also in the running according to recent reports). Upcoming potential market catalysts (now that the tax reform plan has been released) include the start of quarterly earnings late next week and expectations the White House may unveil its long-anticipated infrastructure plan next week. Along with the gains in autos and airlines, homebuilders rose on LEN earnings results, banks on tax reform/rising rate expectations while retailers continue to lag. Following today’s gains, the S&P extended its win streak to six straight days, the Dow Industrials to five days and the Nasdaq Composite win-streak to six days. MKM Partners noted today that if as of yesterday, 171 (or 34%) of the S&P 500 Index components had gained 20% or more on the year. Forty-four are up more than 40%. No fear again with the CBOE Volatility index (VIX) trading below 10 for a 5th day.
· Precious metals slip, extending recent losses as December gold settled at $1,274.60 an ounce, down -$1.20 and holding near 8-week lows (down a third consecutive session). Gold has steadily declined the last few weeks as the dollar extends its recent advance. Markets still weighing the potential success for the recently announced Republican tax-cut proposals as well as increased expectations for another rate hike by the Fed.
· WTI crude oil edges down by 16c, or 0.3%, to settle at $50.42 per barrel, a second straight day of losses (fell over 2% yesterday), down from the best levels since April in a bout of profit taking. Inventory data after the close with API and EIA reports tomorrow. Overall, oil prices were stuck in a tight trading range Tuesday.
Currencies & Bonds
· The U.S. dollar took a breather after the dollar index (DXY) traded to 1-month highs yesterday on increased interest rate hike expectations given strong economic data (ISM report best level in 13-years yesterday), and new tax reform policies. The euro slumped to a 6-week lows against many currencies after an independence referendum in Spain’s Catalonia region turned violent, before paring losses. Federal funds futures markets have priced in more than a 70% chance for a rate hike in December, a sharp increase from the less than 50-50-shot priced in about a month ago following recent comments out of Fed officials. The Aussie dollar dropped after the Reserve Bank of Australia left interest rates unchanged and gave a mixed review of the economy. Despite its recent gains, the dollar remains down more than 8% for 2017.
· Bonds end little changed with the yield on the 10-year holding steady at 2.33% and the 2-yr at 1.47% ahead of private payroll data tomorrow (ADP) and the ISM service report as well. Bond yields have gotten a boost the last few weeks (10-yr up from lows around 2%) on increased expectations that Federal Reserve Chairwoman Janet Yellen and fellow policy makers are inclined to lift interest rates in December.
Sector News Breakdown
· Auto sales benefit from Hurricanes; monthly auto sales for September released today for major autos: GM Sept U.S. auto sales rose 11.9% to 279,397 vehicles vs. est. 7.9%; Ford (F) said Sept U.S. light vehicle sales rose 8.9% to 169,544 vehicles vs. est. up 2.3%; FCAU Sept U.S. auto sales fell (-9.7%) to 174,266 vehicles vs. est. drop of (-13%); TM Sept U.S. sales were up 14.9% to 226,632 vehicles vs. est. up 9.3%; NSANY Sept U.S. auto sales rose 9.5% vs. est. decline (-8.7%); HMC Sept U.S. auto sales rose 6.8% vs. est. up 1.5%
· Other auto news; TSLA announced 3Q17 deliveries of 26,150 units, delivered 14,065 Model S vehicles (down 12% YoY, up 17% MoM) and 11,865 Model X (up 35% YoY and 19% MoM) in the quarter; GM upgraded to buy at Bank America (follows positive commentary by both Citigroup and Deutsche bank yesterday that lifted shares by over 4%); auto supplier LEA downgraded to hold at UBS on valuation while raising tgt; FCAU recalls more than 700K SUVs that at risk for a brake defect according to DJ
· Retailers; URBN was downgraded to sell at Deutsche Bank as they think valuation has stretched to elevated levels, well ahead of the retail rally which we already question as perhaps overdone; COH was downgraded at Wolfe Research as proprietary pricing and promo checks suggest comp & margin upside may moderate going forward; Holiday retail sales seen at $678.75B-$682B during November-December period according to the NRF/Holiday retail sales to rise 3.6%-4% from a year ago level
· Housing & Building Products; homebuilder LEN quarterly profit beats on higher home sales, prices (EPS tops highest estimate n in-line revs of $3.26B), while new orders rise 8% to 7,610 homes; LGIH was downgraded to neutral at Wedbush as price target achieved; MTH said net orders increased approximately 8% to 1,874 in Q3, though noted it lost two weeks of production and sales in Houston due to hurricane which delayed 30-35 closings; WHR will receive a decision by Oct. 5th from the ITC on its safeguard petition against LG/Samsung for the dumping of washers in the US; TTS shares plunge as 3Q prelim sales of about $84M miss est. $87.1M and said prior expectations for full-year 2017 are no longer applicable
· Casino, Lodging & Leisure; casino’s remain active after the tragic shooting that killed 59 and injured over 500 at an MGM Mandalay Resort yesterday; MGM was downgraded to neutral at Susquehanna; FBR Capital trimmed 3Q17 estimates for SIX on unusual weather during the quarter, but remain positive on regional theme park operators SIX and FUN; MCFT announces accretive acquisition of NauticStar boat manufacturer for $79.8M in cash
· E&P sector; FANG announced Q3 production was 85.0 Mboe/d, an increase of over 10% from Q2 2017 average daily production of 77.0 Mboe/d; said Q3 production volumes were not affected by Hurricane Harvey; CPE lowers Q317 and FY17 production guidance (production guidance range of 22,450 to 22,600 Boe/d for Q3, from prior 23K-25K; FMSA shares spiked midday after Bloomberg reported Belgian mining firm SCR-Sibelco NV is considering an acquisition of after the U.S. frack sand miner lost more than half its market value this year https://goo.gl/26ksDr
· Refiners: PSX upgraded to Buy at Goldman Sachs as capital spending continues decline and new projects come into service and they downgraded MPC to neutral on valuation
· Large Cap banks mixed early, but not before Dow components AXP and JPM touched fresh 52-week highs; 52-week highs for several financials: AXP, ETFC, STT, MS, CME, CBOE, BRK/B, JPM, BAC as stocks continue to outperform other asset classes; KREETF (regional banks) decline, snapping 12-day win streak; CPTA shares fell as announced a 25c per share distribution for 4Q, down from 39c in Q3
· Financial services and processors; PAYX as Q1 EPS topped consensus on in-line revenue; EFX House hearing featuring the former CEO Richard Smith, who retired from the company after a security breach that potentially exposed millions of Americans data
· Large Cap/Specialty Pharma; managed care stocks advanced early, while large cap pharma names lagged; RDHL bowel syndrome drug study meets main goal saying BEKINDA®i 12 mg Phase II study successfully met its primary endpoint; ZGNX 4.3M share Secondary priced at $37.50; AVXS rises after positive Initial phase 1 trial data for AVXS-101
· Biotech movers; SGEN announced that the FDA has granted Breakthrough Therapy Designation for Adcetris in combination with chemotherapy for front-line treatment of patients with advanced classical Hodgkin lymphoma (HL); RIGL said its Fostamatinib meets pre-specified primary endpoint; ECYT adds to yesterday’s 157% gain after reports phase III ready prostate cancer therapy pact (shares were upgraded to outperform at Wedbush today based on the attractive opportunity for PSMA-617); CLSN soars after ovarian cancer study results earlier
· Medical devices, equipment and services; EXAS shares active after Canaccord upped tgt to $60 – Baking in conservative Cologuard reordering levels boosts our 2021 estimates; DXCM shares weak again as Bloomberg noted 2018 consensus sales estimates may still be too high now that ABT’s FreeStyle Libre glucose sensor got a much broader approval than expected (recall DXCM shares fell -32% on 9/28 after ABT approval)
Industrials & Materials
· Transports; airlines surge leads transports higher; DAL said Sept total system traffic rose 0.3% noting the hurricanes impacted results and revises September quarter PRASM view to up about 2% vs. prior 2%-3% view (not as bad as feared); overall for Transports, after snapping 9-day win streak yesterday, the DJ Transport index posted fresh record highs, led by gains in DAL, JBLU, AAL, UAL and ALK in the airline space, while rails and truckers pull back a second day (CSX, CHRW) – recall yesterday Morgan Stanley got cautious on rails
· Aerospace & Defense; another standout sector to the upside with 52-week highs for LLL, LMT, NOC, RTN; Defense Secretary Mattis said today that Congress signs off on $400M missile defense shift – discloses approval at hearing
Technology, Media & Telecom
· Internet; Wayfair (W) positive mention at Piper which raised its estimates citing an analysis of Google Search trends that indicated 3Q direct retail revenue growth of 56% vs average estimate of 42%; TRIP estimates cut at Citigroup and added to negative catalyst watch list; FB said it estimates that 10 million people saw the advertisements that have been linked to Russian efforts to influence last year’s U.S. presidential election; AMZN active as Financial Times reported the European Commission will order them to pay back taxes worth “several hundred million euros”
· Semiconductors; semi index (SOX) pares gains after touching fresh 17-yr highs of 1185.52 earlier, with top gainers AMD, ON, SLAB and INTC; semi equipment stocks, which have jumped recently on improved cap-ex outlooks from MU, are leading the declines today (KLAC, ENTG, LRCX, AMAT); semi strength continued, with Aug’17 sales up by 24% YoY overall, including 10% YoY ex memory; comps get tougher from September, as per the Semiconductor Industry Association (SIA), said Bank America; INTCtraded back to best levels since 2000
· Software movers; MANH upgraded to buy at SunTrust as believe risk/reward is now more favorable and the company’s supply chain and omni-channel products will help its customers evolve to digital commerce businesses; ORCL with OpenWorld conference in San Francisco (day three of five)
· Hardware and Equipment movers; EXTR to buy Data Center Business Direct from Brocade; AAOI tgt was lowered to $80 at Craig Hallum and cut estimates modestly to account for potential weakness in 40G relative to prior expectations & worries about increased competition from INTC; ERIC downgraded to underperform at Credit Suisse as sees sales/margins disappointing; FFIVfalls as tgt cut to $90 from $100 at Deutsche Bank and reiterated sell rating saying checks indicate weaker than anticipated demand for the company’s Layer 4-7 appliance refresh
· Media & Telecom; the U.S. Justice Department agreed to clear CTL’s $25B takeover of LVLT if the telecom providers shed some of their fiber-optic infrastructure, moving the deal one step closer to closing. https://goo.gl/TWf2Rt
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.