Monday, October 24, 17
Equity Market Recap
- Stocks surge on better-than-expected earnings from U.S. blue-chip companies (Dow components CAT and MMM) with the Dow Industrial Average setting a new record closing high, while the S&P and Nasdaq also enjoyed gains on the day. Defensive assets such as bonds (yields jumped – 10-yr above 2.4%) and gold slid, while the dollar was mixed and oil prices closed at their best levels since April. Markets continue to keep a close eye on the upcoming European Central Bank meeting, prospects for U.S. tax reform and the Fed leadership succession.
- There are still many unknowns for the market, including who the next Fed Chairperson will be (U.S. President Donald Trump told reporters Monday that he is “very, very close” to making his decision on who should chair the Federal Reserve) and whether it will be seen as dovish or hawkish, and also if the tax reform/cuts will actually get done (though markets appear to be counting on completion with stocks rallying nearly every day to records). Republican Senator Bob Corker, John McCain, Rand Paul may not support tax overhaul, CNBC reported late day, citing an unidentified adviser to Senate Majority Leader Mitch McConnell. Also late day, Arizona Rep Senator Jeff Flake said he won’t seek re-election (potential blow to tax vote).
- Sector movers: Healthcare was a drag on markets after earnings/commentary from BIIB, NVS, CNC and LLY (generally better results but guide/outlook weighed on shares). Tech finished strong with the NASDAQ rising ahead of huge week of earnings (Thursday some of the biggest reports with AMZN, INTC, GOOGL, MSFT, BIDU, KLAC, EXPE, WDC). Autos among top gainers on better earnings results from GM and FCAU, though industrials the biggest boost to markets after MMM and CAT (both Dow components) surge on earnings/raised guidance. Financials the other leader for stocks, jumping on rising rate hike expectations, and tax reform hopes (as bonds fall and yields spike). Transports rise on airline strength. Global markets continue to gain as the Japan Nikkei made it a record 16th straight day of gains overnight.
- Oil prices end on a strong note into inventory data tonight (API) and tomorrow (DOE), with WTI crude rising 57c, or 1.1% to settle at $52.47 per barrel (earlier highs $52.55 and lows $51.55). Following today’s gains, WTI posted its 3rd straight win and settled at its best levels since mid-April, while Brent outperformed, settling at $58.33 per barrel.
- Gold prices slipped -$2.60, or 0.2%, to settle at $1,278.30 an ounce, its lowest settlement in about two-weeks as strength in the U.S. stock market once again dulled demand for safe-haven/defensive assets such as precious metals; markets also await confirmation from President Trump on the next Fed Chair person in the next week or so, with the Fed’s Powell the leading candidate to this point (hawkish for rates). Silver for December delivery ended at $16.966 an ounce, down 10.9c
- The U.S. dollar index (DXY) ended little changed, trading about a dime under the 94 level (lost some “juice” late day on tax talk), though was mostly steady against major rivals throughout the session. The euro with a late day pop, but not much action during the day despite economic data overnight as markets await the ECB meeting later this week. Against the yen, the greenback pared gains late day to end up only slightly. The U.S. dollar traded to 2-month highs against the Canadian loonie, trading near the 1.27 level from October (off Sept 11 low of 1.211). Sterling took a tumble, giving up earlier gains to trade lower against the dollar in the afternoon. Bitcoin prices slipped to under $5,700 after topping the $6,000 mark for the first time yesterday.
- Bonds dropped and yields popped, as the yield on the benchmark 10-year Treasury climbed to the highest level since mid-May (above 2.41% – rising over 4 bps on the session) as stocks surge and amid growing expectations that corporate tax cuts may be on the horizon. The shorter-term 2-yr yield gained as well, rising to around 1.58% while the long bond 30-yr yield traded around 2.92%. There was lots of talk late day about Fed Chair possibilities and Senators speaking on tax reform that moved prices.
- Markit Flash Composite PMI for Oct 55.7 vs. 54.8 in Sept and vs. year ago 54.9 (marked the highest reading since Jan. 2017); new orders fall to 54.3 vs 55.6 in Sept.; flash manufacturing PMI rose to 54.5 this month and hit a nine-month high
- Richmond Fed’s Oct. Manufacturing Survey reported at 12, below est. for reading of 17 and was below last month’s 19; shipments fell to 9 after 22 the prior month, while new order volume slowed to 17 after 20 the prior month and order backlogs fell to 7 after 8 the prior month
Sector News Breakdown
- Autos movers; strong sector; GM reports strong Q3 results, ahead of consensus, on continued strength in North America (EPS 20c beat on $33.6B in revs); FCAU Q3 beat and confirmed its full-year revenue, adj. EBIT and adj. net profit guidance; in auto retail, ABG reports Q3 EPS and sales miss citing impact from hurricanes; MNRO Q2 EPS missed by 2c and lowered its FY17 EPS view
- Restaurants; MCD Q3 EPS and revs were in-line with consensus on better q3 comp sales of 6% vs. est. 4.5% and better int’l comps/says on track to deploy mobile order & pay in 20,000 stores; CMG to report earnings after the close tonight
- Housing, Home Furnishings, and Building Products; WHR reporting disappointing 3Q results and cutting its 2017 EPS forecast for a 3rd time and said is no longer providing SHLD with most appliances; homebuilder PHM Q3 profit edges past estimates as prices, sales rise; building products maker MAS Q3 EPS missed by 2c on slight revenue miss; SWK active on earnings beat and raised guidance by over 1% for the year; in furniture, HNI shares plunge after cutting its 2017 outlook after lowering its view in June and July, while KNL Q3 EPS and revs topped views saying Q3 was “an important inflection point” as sales stabilized (shares of MLHR also active on reports)
- Retail; CONN rises as provided 3Q update showing improvements in its credit business gain traction; HBI was downgraded at Oppenheimer; NKE will be hosting an investor day on October 25, its first since October 14, 2015; Sports-related names UAA, NKE, DKS, FINL, FL fell after sneaker maker Puma said that gross margin in 4Q won’t match that of the past three months due to high retail inventories, promotional activity in some markets, including the U.S.
- Casino, Lodging & Leisure; in leisure, PII Q3 EPS/sales top views and raise guidance as Off-road vehicle sales increased in the mid-teens; casino stocks were mostly lower
- Energy stocks failed to rally, with oil services (WFT, HAL, BHGE) underperforming, along with weakness in the MLP sector as bond yields rise (making dividend stocks less attractive); refiners and E&P names were mixed ahead of earnings in the coming weeks
- MLPs; ENLC upgraded to buy at UBS with $19 tgt given the recent sell off as we believe the company’s 16% interest in Oklahoma Tall Oak is underappreciated
- Refiners: Macquarie with a few rating changes as they upgraded ALDW and DK to outperform; HFC downgraded to underperform; PBF and VLO downgraded to neutral from outperform
- Other movers on earnings; CLB reported an earnings beat on revised down numbers, Q4 guidance in-line with street; GPOR Q3 Net Production 1.2 Bcfe/Day, up 16% YoY; Q3 realized natural gas price avg $2.28 per Mcf
- Banks; group broadly higher as bond yields rise/increasing expectations of higher rates/tax reform; JPM tops $100 per share; several regional banks out with earnings; RF reported an in-line Q3 with operating earnings of $550M impacted by lower fees and boosted by lower expenses; ZION in-line EPS and NIM but higher operating expenses; FITB avg. portfolio loan and lease balances were flat q/q, and down $1.6B y/y; FRC 2.5M share secondary priced at $97.30
- Brokers, Asset managers; AMTD with weaker Q4 operating income of $444M as EPS missed by 7c, driven by lower commissions $330M and higher expenses; WDR Q3 operating revs beat but cut its dividend to 25c from 46c
- Insurance; AFSI was downgraded by FBR Capital saying adverse reserve development remains biggest challenge and BV not likely to grow for the foreseeable future
- REITs; ACC earnings report and downward revision to headline 2017 FFOM guidance were slightly below consensus expectations; PEB rises after 3Q AFFO topped expectations and it raised the low end of its annual AFFO guidance; SUI
- Large Cap Pharma; ALXN rises as the FDA approved its Soliris (eculizumab) for the treatment of adults with generalized myasthenia gravis (gMG). gMG represents the drug’s third indication and a potential $1B+ opportunity said Cowen; IPXL announced the approval of its generic Renvela (sevelamer carbonate) 800 mg tablets, which will be launched immediately; few large earnings out today with LLY, NVS both reporting results; CRBP 4.65M share Spot Secondary priced at $7.00; CNC Q3 beat but midpoint of guidance below estimates; PTIE surges as announces successful Phase I clinical study for PTI-125
- Biotech movers; group was mostly lower on some earnings; BIIB beat on both the top and bottom line but U.S. Spinraza sales were sequentially flat and the core MS business missed slightly (IONS shares also active on the Spinraza sales); GILD reported added details for its experimental nonalcoholic steatohepatitis (NASH) drug, GS-0976
- Medical devices & equipment/services; THC slides after the company’s chief executive officer left the company at an earlier-than-expected date; BSX initiated buy and Street high $36 tgt at Canaccord saying to outperform over the next three-years; HSTM rises initially on earnings beat before sliding; WAT mixed results with decline in margins; MDXG negative mention by Citron Research weighed on shares midday
Industrials & Materials
- Machinery; Dow component CAT rises as Q3 EPS and revenue handily beat estimates and the company also boosted revenue and earnings forecast for the year (now sees year EPS about $6.25 vs. prior view of $5.00 and estimate $5.24) – shares pared gains after c/c saying expects pressure on price and material costs 2H of year; PCAR Q3 EPS/sales topped views but shares fell midday after saying it sees no improvement in profitability next year.
- Industrials and Multi Industry; Dow component UTX boosted its 2017 forecast for the 2nd straight quarter while posted the strongest organic growth since 2011; Dow component MMM boosts its full-year earnings view and 3Q profit and sales top estimates; HUBB, PNR also reported earnings; shares of MSM, GWW dropped midday after AMZN launched Business Prime Shipping, a paid annual membership program for registered multi-user business customers in the U.S. and Germany; metals were broadly higher, led by gains in steel makers; GE falls to 2 ½ year lows on further earnings related weakness from last Friday
- Aerospace & Defense; in defense, LMT Q3 EPS and sales both fell short of consensus though boosted its year earnings and sales outlook; BA, NOC and GD to report earnings tomorrow
- Transports; in logistics, Ryder (R) Q3 beat and Q4 was above views; in airlines, JBLU inline quarter but 4Q CASM higher, Transports in about a 50-point range today with highs 9,995 as airlines led behind JBLU results (AAL, DAL, UAL all up over 1%)
- Chemicals; SHW Q3 sales beat with some analysts noting improving pricing, while company cuts its year EPS forecast to $11.20-$11.50 from $13.00-$13.20 after hurricane impact
- Packaging, Containerboard names active after GPK agreed to combine with IP’s North American consumer packaging unit.
Technology, Media & Telecom
- Semiconductors; index at another fresh 17-year high today (SOX index up 17 of the last 20 trading sessions) as chip names rally into expected strong earnings in space; some positive semi-read through after AMS guidance yesterday (which lifted optical stocks as well such as LITE); SIMO boosts dividend by 50%; VECO falls as KeyBanc downgraded to sector weight saying triple threat in Veeco’s MOCVD business related to share loss, pricing risk, and potential market slowdown in 2018 prompts a downgrade; RMBS up on earnings beat
- Software & Hardware; CVLT Q2 software revenue came up short—$72.0M vs consensus of $78.8M—and only grew 2% YoY while EPS missed; RHT downgraded to underperform at Bank America noting shares are up ~75% YTD through yesterday’s close
- Hardware & Components; GLW rises as Q3 core EPS and sales both top consensus views; IBM dropped back below 200 day support of 158.55 today – after surging last week on earnings
- Media & Telco; ad agency stocks get miss on the top and bottom line for IPG, in industry that has seen a few profit warnings the last few weeks (OMC, WPPGY also moving); CRTO was downgraded at KeyBanc citing a larger-than-expected impact on Criteo’s revenue from Apple’s implementation of Intelligent Tracking Prevention (ITP) in iOS 11; HMNY said its subscriber base has surpassed 600,000 members; two months ago the company lowered the price of its subscription to $10 a month from as much as $50
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.