Thursday, October 5, 17
Equity Market Recap
· Stocks just continue to push higher! The S&P 500 Index and Nasdaq Composite advanced for an eighth straight day, while the Dow Industrials rose for a 7th straight session, with all three closing at new record levels ahead of the monthly nonfarm payroll report tomorrow morning. Overall, stocks, oil and the dollar all strengthened, while bonds dipped following another round of better economic data ahead of Friday’s jobs report. Fed speakers (Williams and Harker) reiterated their view that an interest hike in December is likely coming, followed by more in 2018 (in-line with market current views), which boosted the dollar to 7-week highs. European markets bounced after reports Catalans were said to stall their push for independence (Spanish markets bounced). Crude prices rose the most in a week as the exporters as Saudi Arabia and Russia signaled continued cooperation on efforts to erode a global crude glut (oil snapped 3-day skid). The SmallCap Russell 2000, which snapped its 8-day win streak yesterday, posted a fresh intraday high, while the Dow Transports slip a second day (after record highs yesterday morning).
· With the S&P 500 closing at a record Thursday it marks the longest string of all-time high closes, six consecutively, since 1997, according to WSJ Market Data Group. News that helped push markets midday: The House of Representatives passed a budget resolution on Thursday, a step that Republican leaders are using to set the stage for an overhaul of the tax code. The Senate Budget Committee is planning to vote on a separate budget on Thursday, and Republicans are planning to write a single measure that will pass both chambers.
· Another big story remains who President Trump will pick for Fed chief if Janet Yellen isn’t selected for another term. The WSJ reported last week that Trump interviewed former Fed governor Kevin Warsh for the job, along with current Fed governor Jerome Powell. Other names mentioned were Yellen and his top economic adviser Gary Cohn. Wildcards include Stanford University economist John Taylor may be one, along with John Allison, the former CEO of BB&T Bank – all have been speculated over the last few weeks.
· Weekly Jobless Claims fell 12K to 260K, below est. 265K and prior week unrevised figure of 272K; the 4-week moving average declined by 9,500 to 268,250, a figure still inflated by hurricanes Irma, Maria and Harvey; continuing claims rose 2K to 1.938M in the week ending Sept. 23
· The U.S. trade deficit dropped (-2.7%) in August to -$42.4B from -$43.6B in July and was slightly below estimates of -$42.7B deficit; Imports slipped 0.1% to $237.7B while exports rose 0.4% to $195.3 billion, the Commerce Department said
· Factory Goods Orders for August rise 1.2% vs. est. up 1.0%, while Factory orders for July unrevised at -3.3%; new orders ex-trans. for Aug. rise 0.4% and new orders ex-defense for Aug. rise 1.4% after falling 3.7% in July
· Commodity prices: WTI crude oil prices advance 81c, or over 1.5% to settle at $50.79 per barrel (high $51.22 and low $49.85), snapping its current 3-session slide – the recent decline came despite bullish inventory data. Gold prices ended lower as the dollar extended its gains to 7-week highs; December gold loses -$3.60, or 0.3%, to settle at $1,273.20 an ounce. It has been a down week for gold thus far with investors now awaiting Friday’s jobs report, which is expected to show the clearest sign of the effect of Hurricanes Irma, Harvey and Maria on job creation for September. Another strong report might push the dollar higher again, and weigh on gold prices.
· The dollar index (DXY) rises to highs of 93.97 (94.57 is the 100 day resistance), best levels since mid-August and extending gains against the euro and Pound. The euro dropped to lows around 1.17, down over -0.4%, while the British pound extended its drop against the dollar to hit a 4-week low (down around 1.313) amid BoE rates and political uncertainties (fell around 1%). Bloomberg noted on the Pound that even with the market priced for a hike in November, the U.K. currency has managed to undo all its gains since the last BOE meeting as PM Theresa May’s chances of surviving as leader of the Conservatives look increasingly uncertain. The dollar recent boost a product of rising rate expectations from the Fed, reflation trade as Washington tax reform policy gaining traction, and better economic data.
· Treasury markets slipped following better jobless claims data and commentary from various Fed speakers indicating expectations to raise rates gradually (Fed Harker comments); the yield on the 10-year inch back above 2.35% while shorter term 2-yr rises above 1.49%. Next catalyst for the bond markets, tomorrow’s nonfarm monthly payroll report.
· San Francisco Fed President John Williams said he doesn’t need to see inflation move higher to support another interest rate increase this year. He does, however, need to see that other economic data points to continued economic strength. Williams said one more rate hike this year and another three next year are likely to be the appropriate path, as inflation need not support another hike since other data points to economic strength. He views Trump tax plans as more favoring the demand side rather than supply side, while the tax reform shouldn’t overlook the country’s long-standing unsustainable fiscal position
· The Federal Reserve is likely to raise interest rates again in December but the move depends on the performance of inflation over the next few months, said Philadelphia Fed President Patrick Harker on Thursday. “I have penciled in a third rate hike in December but we have to see how the inflation dynamics play out,” Harker said in an interview on CNBC.
Sector News Breakdown
· Retailers; nice gains in beaten up department stores and apparel names with broader market rally (M, AEO, URBN); COHdowngraded to neutral at Piper as they expect the stock to enter into a period of digestion as the company integrates Kate Spade; in monthly comp sales data: BKE Sept comp sales fall (-5.7%) vs. est. down (-7.5%), while CATO comps fell (-11%) vs. est. (-10%); LB Sept comps fell (-2%), with weakness in Victoria Secret and strength in Bath & Body works; ZUMZ boosted its Q3 EPS view after Sept comps rose 9.3%; DECK outperformed midday with shares spiking (initiated with a buy and $80 tgt at Pivotal today)
· Consumer Staples; STZ Q2 results handily top views, as EPS beats by 30c on revs of $2.08B, while boosted its year EPS outlook to $8.25-$8.40 from $7.90-$8.10 (street $8.16)
· Auto movers; GM shares slip after rising more than 8% over the last 4-days on positive analyst comments regarding and stronger Sept auto sales – seemed like a little profit taking in the autos today (F, GM, FCAU); KMX was downgraded at Oppenheimer
· Casino, Lodging & Leisure; PNK and PENN shares jumped late day after the WSJ reported the two consider a merger, but the casino operators so far haven’t been able to reach terms, but Penn National remains interested in buying Pinnaclehttps://goo.gl/MhS7tw; in amusement parks, SEAS jumped late day after reports that Merlin Entertainment, the owner of LEGOLAND had approached the company about a sale…but just interested in just part of SeaWorld https://goo.gl/HRgBU6; SIXdowngraded to long-term buy at Hilliard Lyons; NCLH to replace LVLT in the S&P 500 index; ISCA Q3 EPS and revs topped consensus and year midpoint of guidance above views; PII mentioned cautiously by Northcoast citing sharp retail slowdown
· Energy stocks outperform given the rebound in oil prices (rises first day in four); oil drillers led early (RIG, ESV, DO); though E&P stocks were mixed; oil prices advanced over 1.5%, snapping a 3-day losing streak; refiners were mixed (ANDV 52-week high early on) after a group of 38 U.S. senators asks the EPA not to make changes to U.S. renewable fuel mandates, including possible reductions in annual quotas for biodiesel and cellulosic ethanol.
· Oil Equipment; Jefferies initiated coverage on pressure pumps with buys on PUMP and FRAC and TUSK with a Hold as they think more intensive fracking is an integral driver of well productivity in US shale and model frac horsepower (HHP) demand to grow nicely through ’20/believe pricing and activity gains skew 3Q favorable, even with hurricane related disruptions in TX (also said they see room for upside for RES and CJ, though they cut RES to hold)
· E&P sector; MTDR 8M share Spot Secondary priced at $26.35; CRZO backs Q3 production guidance despite Hurricane Harvey impact
· Utilities; slides amid rise in yields; group seen as interest rate sensitive for the dividend paying sector; modest weakness as bond yields jump; UTY index traded lower; NEE, ES, EIX, XEL post modest losses thus far with ETR, DTE, PEG outperforming early
· Large Cap banks/regionals/brokers outperform; insurance names rise as well given the jump in bonds yields/rising rate expectations 52-week highs for- C, RJF, SCHW, CME, ETFC, BAC, STT, MS, TMK, BLK, UNM, AMG, MET, AMP, ICE, TROW, CBOE all touch yearly bests today; San Francisco Fed President Williams again reiterated confidence in inflation achieving the 2% goal, leading treasury yields to break out to session highs (and lifting banks)
· Insurance; few prelim loss updates after Hurricanes: WRB said prelim catastrophe losses attributable to Hurricanes Harvey, Irma and Maria and the earthquakes in Mexico are expected to be less than $110 M, before tax, or $72M, after tax; RNR announced it anticipates an initial estimated net negative impact of $625M from Hurricanes Harvey, Irma and Maria and the Mexico City Earthquake
· Asset managers; Morgan Stanley boosted Q3 EPS estimate +0.5% for the group and are 2.8% above consensus as they upgradedTROW to equal-weight but downgraded HLNE (to EW) and LM (to UW) on valuation/says they continue to see a supportive backdrop for ebrokers, traditionals, and alternatives while they favor IVZ and CG into the quarter on potential topline and EPS beats
· Brokers; Nomura said seen a pickup in inbound for the eBrokers (AMTD, ETFC, SCHW) and SMid (RJF, SF, LPLA) following strong 3Q performance, with LPLA the standout (+24%), and SCHW the laggard (+3%)/for 3Q, they see greater upside to cons. at LPLA, AMTD, ETFC
· Finance & Lending; NAVI shares volatile early after Pennsylvania Attorney General Josh Shapiro filed a lawsuit over widespread abuses in student loan origination and servicing businesses; US consumer watchdog unveils plans to crackdown on payday lenders, as the CFPB issued rules today that require payday lenders determine upfront whether customers can repay their loans
· Large Cap Pharma/Specialty; HZNP positive mention at Jefferies saying they think its product Tepro is an undervalued asset has the ability to become HZNP’s largest product; MNK was downgraded to hold at Canaccord based on the downward inflection on the Inomax and Acthar franchises from potential competition emerging around 2020; PRGO tgt upped to $98 at UBS as new product rollouts and increasing penetration of store brands can drive 2%-4% growth; ACAD launches late-stage study of Nuplazid in dementia-related psychosis; RYTM 7.05M share IPO priced at $17.00; RIGL 18.1M share Secondary priced at $3.35; LLY jumped late day as its patent for its lung cancer drug Alimta was upheld, the Patent Trial and Appeal Board said
· Biotech movers; SNY and REGN won a new trial in their fight with AMGN over the cholesterol drug Praluent after an appeal court said they can raise issues related to the validity of the Amgen patents; BIIB was upgraded to overweight at Morgan Stanley (tgt to $375 from $311) saying the base business is underappreciated and Ocrevus share loss is slower than expected, while the firm downgrade CELG to underweight given underappreciated generic risk and a cautious view on 2018 pipeline potential; PBYItgt raised to $156 at Citigroup on buyout thesis;
· Medical devices, equipment and services; ABC upgraded to buy at Baird saying that the company brings the cleanest story among its peers over the near- and intermediate-term, and warrants a valuation premium; MDT, PODD, active after JNJ said its Animas has discontinued the sale of all insulin pumps in the U.S. and Canada; CDNA 4.342M share Secondary priced at $4.00
Industrials & Materials
· Industrial & Machinery; cautious comments on GE at both Deutsche Bank and Morgan Stanley, with the latter saying GE likely to miss 3Q adj. EPS, may earn 48c vs 50c Street estimate, as estimates likely below Street numbers
· Transports; UPS and FDX shares were active after Bloomberg reported that AMZN was testing a new delivery service called Seller Flex to make more products available for free two-day delivery; overall though, the transport index down only slightly, around the 9,900 level most of the afternoon (but down from record highs early yesterday of just above 10K)
· Chemicals; paint maker SHW double upgraded to buy from underperform at Bank America as the company announced a 3-5% price increase on Tuesday and detailed plans to expand PF EBITDA margin (raised tgt to $435)
Technology, Media & Telecom
· Internet; GRUB was downgraded at Citigroup on valuation; SNAP active after Needham said sees 10%-20% near-term downside, based on fundamental weakness; SHOP extends yesterday losses early after Citron Research negative comments; NFLX raising prices in U.S. starting today: standard $9.99 plan will be $10.99/month, premium $11.99 plan will be $13.99
· Optical movers; NPTN guidance for 3Q gross margin has been lowered to 14-17%, down from 23-26% and also announced restructuring actions that will lead to job cuts/lower revs as well (shares of OCLR, FNSR, LITE, ACIA were active on guidance); ACIA estimates lowered at MKM Partners saying will have lower growth in 4Q and 2018 than originally expected
· Software & Hardware movers; MSFT led early after Canaccord upgraded shares to buy with an $86 target citing four compelling growth drivers in: (1) Office Productivity; (2) Gaming; (3) Marketing; and (4) Azure’s Platform as a Service; CTXS announces restructuring program with employee cuts; WDC downgraded to hold at Deutsche Bank on peak NAND market trends
· Media movers; Movie theatres RGC and CNK were upgraded to equal-weight from underweight at Morgan Stanley noting shares have lagged the market YTD by ~31% and ~16%, respectively, thanks to a disappointing summer box office and P-VOD concerns…but think fears of the implications of the former are overdone and of the latter reasonably priced in
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.