Wednesday, October 11, 17
Equity Market Recap
· Major U.S. averages grind higher late day, adding to record closing levels for most of them, though many trade in a very narrow range ahead of the earnings barrage over the next month. Financials dipped ahead of earnings results for JPM and C tomorrow (BAC, PNC, WFC Friday), while bonds were little changed. Markets didn’t react to the FOMC minutes late afternoon, as commentary was in-line with previously forecasted expectations for one more rate hike this year. The Dow Industrials averages closed higher, but traded in narrow range of about 50 points (high 22,872 and low 22,821). Defensive sectors REITs and utilities continue their recent rebound while staples attempt to stabilize. Oil prices gained, while gold slipped for the first time in four days and the dollar dropped for a fourth day. In Europe, relief rally seen in Spanish assets in reaction to Catalonia looking for negotiations rather than immediate independence. In stock movers, 52-week highs today for Dow components AXP, BA, CAT, MCD, V and WMT, while there were a few 52-week lows today in the S&P 500 (DISH, GE, WBA, DISCA, DISCK, NAVI, ESRX, VIAB, and EVHC). Odds of Fed hike by year-end were steady, around 75%, after minutes showed many Fed officials saw another rate hike warranted this year, were concerned low inflation is not only transitory.
· Regarding the next FOMC Chairman, Politico reported that Treasury Secretary Steven Mnuchin is strongly pushing for the White House to name Jerome Powell as the next chair of the Federal Reserve https://goo.gl/w1NisH, while the WSJ reported economists see former Fed governor Kevin Warsh as the most likely to be nominated by President Donald Trump to lead the Federal Reserve, according to a Wall Street Journal survey. https://goo.gl/ZLKVxM
Fed Minutes from prior FOMC meeting
· Federal Reserve officials held a detailed debate last month over whether forces holding inflation down were persistent or temporary, with several policy makers looking for stronger evidence of price gains before supporting a third interest-rate hike this year. “Many participants expressed concern that the low inflation readings this year might reflect not only transitory factors, but also the influence of developments that could prove more persistent,” according to minutes of the Sept. 19-20 meeting. Several policy makers said their decision on whether to raise rates this year “would depend importantly on whether the economic data in coming months increased their confidence” on inflation rising toward their 2% target.
· At the meeting, the U.S. central bank left the target range for the federal funds rate unchanged while projecting another increase before the end of the year and announcing an October start for a gradual unwind of its $4.5 trillion balance sheet. The minutes suggest that the forecast for another rate increase in 2017 is conditioned on economic data showing that the inflation target is within reach over the next couple of years – Bloomberg
· Gold prices fall for the first time in 4 sessions, slipping -$4.90, or 0.4% to settle at $1,288.90 an ounce, as markets closed prior to the FOMC Minutes release at 2:00 PM today. Commentary from Fed speakers today (Fed’s George said waiting for inflation to hit the central bank’s 2% target before further interest rate hikes would be a mistake), along with rising rate expectations have dented prices the last few weeks.
· Oil prices close higher, adding 38c, or 0.8% to settle at $51.30 per barrel ahead of inventory data tonight and tomorrow (DOE data pushed out to tomorrow morning at 11:00 AM due to Columbus Day holiday and API data out tonight). Oil prices tacked on to yesterday’s 2.7% gains despite reports that OPEC crude oil production jumped last month by nearly 90,000 barrels a day, complicating the cartel’s efforts to limit output and curb the global supply glut. Meanwhile, the U.S. Energy Information Administration raised its crude-oil price forecasts for this year and next and lifted its U.S. production outlook for 2018, according to a report released
· The U.S. dollar weakened for a 3rd straight session as potential tax delay concerns have arisen this week due to President Trump/Corker dispute; the dollar index sank to the 93 level (down -0.3%) after hitting one-month highs late last week (94.26). The euro rises and holds around the 1.185 level (best in 2-weeks), while the dollar pared losses vs. the yen and Pound. The FOMC minutes did very little move currencies, offering few surprises.
· Bonds ended slightly higher, barely moving after the minutes from the September FOMC meeting showed no surprises, as the Fed appears on track to raise rates one more time this year. Yields slipped, with the 10-yr dipping to 2.34% from 2.35% late yesterday and the 2-yr yield holding above 1.51%. There were also two bond auctions today as the U.S. Treasury sold $24B in 3-yr notes at a yield of 1.657% (in-line with prior yield before auction), with a bid-to-cover at 2.83 vs. 2.70 prior and indirect bidders awarded 54.3% of auction. Later in the day, the U.S. sold $20B in 10-yr notes (refunding) at a yield of 2.346% (vs. 2.348% prior to auction), with bid-to-cover at 2.54 vs. 2.28 prior and indirect bidders awarded 69.1% of auction (only 6% to directs).
Sector News Breakdown
· Retailers; group buoyed by positive investor day comments/stock buyback out of WMT yesterday (several analysts raised tgts on stock); apparel names slide on the day (AEO, URBN); CHS downgraded to underperform at Bank America; Morgan Stanley said in Smartphone survey that fewer respondents plan to purchase new smartphones in big box stores (neg read-through BBY); UAAtgt cut to $14 at Piper after semi-annual teen survey indicated a further softening in athletic apparel; sporting goods stores weaker after Wells Fargo said that despite DKS having slashed forecasts for rest of this year, thinks next year’s estimates need to come down (HIBB, SPWH)
· Consumer Staples/restaurants; CL upgraded to buy at SunTrust and raised tgt to $85 from $65 saying investors seeking companies with high emerging market/FX exposure will enable CL shares to outperform its peers over the coming quarters; KRsaid it sees FY18 EPS to be flat to slight growth during analyst day and said is considering sale of its convenience stores; TAdowngraded to sell at Citigroup following rally in shares; MCD among top gainers in the Dow Industrials today; BOJAdowngraded at Stephens to equal-weight
· Auto movers; HOG cautious mention at UBS saying expected to see worsening retail sales in 3Q as firm cuts tgt to $47 from $57;GT boosted its dividend; AAP shares weakened after BTIG lowered Q3 and year earnings estimates
· Oil prices were little changed after rising nearly 3% yesterday. OPEC crude oil production jumped last month by nearly 90,000 barrels a day, as output by OPEC members rose by 0.27%, to 32.75 million barrels a day in September, compared with the month prior. The increase was driven by higher production in Libya, Nigeria, Iraq and Gabon, according to OPEC’s closely watched monthly oil market report. Inventory data pushed out to tomorrow due to Columbus Day holiday.
· Bloomberg highlights that the Saudi’s efforts to prop up oil prices has pushed its output to the lowest level since January of 2015; about 1M bpd less than the 10.7M it pumped in November of 2016. Reuters reports that Saudi Arabia will cut its November crude exports to China and Japan, two of Asia’s biggest buyers/comes as part of an OPEC-led effort to rebalance global oil markets.
· In news/top movers; BHGE recently held takeover talks with energy-services company Subsea 7 SA, according to people familiar with the matter, WSJ reported, though noted talks broke down over valuation, though they could be revivedhttps://goo.gl/1AUf5j; RRC was upgraded to overweight at Barclays to reflect a sharp contraction in the multiple along with our expectation that RRC’s returns on new capital will meet or exceed peer averages; SLB downgraded to Market Perform at BMO Capital and lowering tgt to $72 as they see risk to 2018 estimates (they are 9% below consensus) and limited room for multiple expansion
· Utilities; the group remains strong despite rising rate expectations, with the UTY touching high of nearly 693 before paring gains (record high 703.16 on 9/11); in research, EXC was downgraded to sell from neutral at Goldman Sachs saying consensus earnings estimates have downside risk given weakness at the company’s merchant power segment; the firm upgraded SRE to buy from neutral saying utility and infrastructure project developments in the U.S. and Mexico create an “active catalyst path” over the next six-to-nine months
· Banking stocks; earnings this week from C and JPM 10/12, BAC, PNC, WFC, FHN on 10/13; KBW Inc. said banks with most exposure due to California wildfires include WABC & BMRC given their footprints in the Northern Bay Area of CA, with UMPQ & TCBK having significantly lower levels of exposure in insurance; UVE announced $351-$452M of gross pre-tax Hurricane Irma losses. Bloomberg noted that since Nov. 8 U.S. election, BKX is up 34% vs SPX +19% gain, propelled in part by expectations about the Trump administration’s agenda; BAC +53% since Nov. 8 vs C +51%, JPM +39%, GS +33%, MS +45%, WFC +22%
· Asset managers with monthly AUM data: AB said preliminary assets under management (AUM) increased to $535B from $529B MoM; IVZ preliminary month-end AUM was $917.5B, an increase of 1.2% MoM; APAM prelim AUM, as of September 30 totaled $113.7B; LM reports September preliminary AUM $754.4B; TROW prelim Sept AUM $948B vs. $934B end of August; VRTS Sept prelim AUM $90.6B, up from $88.5B QoQ; in earnings, BLK operating revenues were above forecast mainly due to higher performance fees
· Cards, Finance and Lending; MA and Visa (V) both assumed coverage with outperform ratings at Wells Fargo while AXP named top pick; PYPL was upgraded to overweight at Morgan Stanley and raise tgt to $76 saying it has a long runway of high teens rev growth and manageable risk from EBAY contract renegotiation; GDOT downgraded to hold on valuation but tgt raised to $55 from $44 at LakeStreet
· Large Cap Pharma; few analyst calls in space that was generally fairly quiet after weakness the first part of the week; ABBV was upgraded to outperform at Cowen saying pipeline candidate, Upadacitinib seen as competitive in rheumatoid arthritis and superior to Regeneron’s Dupixent in atopic dermatitis; BMY tgt was raised to $72 at Goldman Sachs while the firm cut MRK tgt to $68; JNJ was upgraded to buy at Jefferies as believe multiple under modeled TIRADE pharma assets; ATHX rises early after reporting manufacturing pact with Nikon; MNKD sells 10.17M shares at $6.00 in registered direct offering; AERI shares jumped after FDA staff report indicates Aerie’s proposed label for its glaucoma therapy, Rhopressa, will be discussed during this week’s advisory committee meeting
· Biotech movers; BLUE resumed coverage with hold at Jefferies (from buy); ONCE vote tomorrow as gene therapy Luxturna for treatment of patients with vision loss due to confirmed biallelic RPE65 mutation-associated retinal dystrophy faces an FDA advisory panel; FLXN secondary expected to price tonight and ANAB secondary tomorrow night
· Medical devices and Equipment; CRY falls as guides Q3 revs about $44M below $47M estimate and acquires JOTEC for $225M;DVA boosted share buyback authorization to $1.5B
Industrials & Materials
· Industrial & Machinery; GE tgt cut to $20 at JP Morgan as firm said they now see a dividend cut, or “adjustment” as it is likely termed, as increasingly likely/said recent work at Power shows challenges are NOT cyclical; HDSN guided Q3 EPS and revs below estimates (3c-5c on revs $25M vs. est. 10c/$40.97M)
· E&C sector; Seaport Global downgraded GVA and TPC to neutral with top pick PWR saying risk but strong backlog, recent M&A and hurricane rebuilding will be positive; firm also said NVEE top growth pick on strong organic and M&A growth
· Distributors slide early on FAST results, coming in-line with quarterly earnings, but results were held down by higher employee costs and the impact of hurricane, which resulted in an increase in sales of lower margin products (GWW shares slipped early in reaction)
· Transports; DAL Q3 EPS beat by 5c on better revs of $11.06B, while Q3 passenger unit revenue up 1.9%/said sees continued pressure on margins as its unit revenue momentum catches up to the rise in fuel prices that began in July; JBLU says the hurricanes lopped off $44M from revenue and about $30M to $35M from operating income, while traffic fell -4.4%; overall transport index traded as high as 9,992, back near recent record highs
· Metals & Mining; steel stocks (X, NUE, AKS) outperformed early; Kobe Steel said reports were falsified on two more products, iron powder and target materials, according to statement; Citigroup cautious on some steel stocks ahead of earnings (X), but group led metals
Technology, Media & Telecom
· Internet; BABA said it sees over $15B in R&D investment over the next three years; AMZN is launching a monthly payment option for college students priced at $5.49 per month after a six-month trial and with no annual commitment; Goldman Sachs assumes names in Internet sector with buys on IAC and ANGI though sell rated on GRPN; AMZN and GOOGL tgt raised to Street high $1,350 at Credit Suisse as well as high for FB to $235 and SNAP tgt upped to $20; NFLX down for a 3rd straight day after reaching record highs above $198 last Friday
· Semiconductors; MU announced that it is raising roughly $1 billion in onshore cash via an offering of common shares with proceeds used to accelerate its debt repayment plan; HIMX downgraded to neutral at Mizuho saying shares reflect the 3D sensing story in 2018-19; XPER falls as German Federal Patent Court issued a preliminary ruling that all claims of the asserted patent against AVGO are not valid, and that enforcement of the previously instituted injunction are suspended; Philly semi index (SOX) traded to fresh 17-year highs earlier
· Software movers; CUDA shares fall after the company saw another quarter of 20%+ core billings growth and >100% public cloud growth…though margins fell -470 bps YoY and rev guidance for next quarter below views ($92.5M-$94.5M vs. est. $94.4M), weighing on shares; AKAM announced this morning the acquisition of Nominum, a DNS and enterprise security company
· Hardware and equipment; JNPR was downgraded to underperform at Bank America as sees more balanced risk/reward given a mix of tough comps, potential weaker carrier capex environment, and limited margin upside (tgt cut to $31)
· Media & Telecom; HMNY shares rise again despite being mentioned negatively by Citron Research noting shares up over 800% YTD; MSGN was upgraded to buy at Loop Capital; FOXA weakened after the US men’s soccer team failed to make the World Cup (first time in last 8-tournaments) – in 2011, FOXA reportedly paid more than $400M to outbid DIS for the English language rights to the broadcast in 2018 and 2022.
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.