Friday, November 3, 17
Equity Market Recap
· What a week for U.S. stock markets, surging to new all-time highs following: better earnings, strong economic data (though jobs data was soft today), the Republican tax bill plan being released, a new Fed chairman named, several central banks in action (FOMC and BOE) and the week capped with potentially two major upcoming M&A deals according to reports. All in all, another jammed pack week of news, earnings and record high stock averages.
· First, the monthly U.S. jobs report showed that the economy added less jobs in October than expected and the unemployment rate fell to 4.1% from a nearly 17-year low of 4.2%, while wages were steady vs. an expected jump. However, the ISM services index rose to a 12-year high in October, keeping expectations for a Fed rate hike in December. Speaking of the FOMC, the central bank concluded its most recent policy gathering on Wednesday without a substantive change, as expected (no change to rates), while yesterday, the Bank of England raised rates for the first time in a decade moving currency markets.
· Out of Washington this week, President Donald Trump nominated Fed Governor Jerome Powell to replace Chairwoman Janet Yellen as the head of the Federal Reserve going forward. Also yesterday, the long-awaited Republican tax plan which was published, as the bill is estimated to add $1.49 trillion to the budget deficit. The headlines include the promised corporate tax cut to 20%, the reduction of most individual tax brackets, changes to mortgage interest deductions and the phasing out of the estate tax over five years.
· Lastly in corporate news, earnings was a big driver of stocks this week with some good (energy dominated MRO, NRG, DVN, FLR) and some bad (EVHC, UAA, NWL, and media names like DISCA), while tech outperformed after AAPL topped views last night. Semiconductors traded to levels not seen since 2000, led by a jump in QCOM after Bloomberg reported AVGO is said to plan a bid for the company (note QCOM currently in process of buying NXPI and AVGO was waiting to close on deal to buy BRCD). Not to be topped, Reuters reported late day that CVS and AET are working toward finalizing merger terms and announcing a deal by as early as December (details and links to stories below).
· Jobs report missed; the October payroll report showed 261K jobs were added, below the 313K estimate, while prior month upwardly revised to 18K from (-33K); private payrolls rose 252K, below the 302K estimate (prior revised to 15K from -40K), though manufacturing jobs rose 24K topping 15K estimate; the unemployment rate dipped to 4.1% from 4.2% (as the participation rate dropped to 62.7% from 63.1%, while hourly wages were unchanged vs. an expected 0.2% increase (and below the 0.5% rise last month)
· Trade Deficit for September widened to (-$43.5B) from (-$42.8B) last month and vs. est. (-$43.2B); imports rose 1.2% in Sept. to $240.31B from $237.51B in August and exports rose 1.1% in Sept. to $196.82B from $194.75B in August
· ISM Non-Manufacturing for October rises to 60.1 (only the 4th time in 20-years keeping data over 60 level per CNBC), topping the 58.5 estimate and above 59.8 prior month; composite index at the highest level since Aug. 2005; segment breakdown: new orders fell to 62.8 from 63.0, while employment rose to 57.5 vs 56.8; prices paid fell to 62.7 from 66.3
· Factory Goods Orders for September rise 1.4% vs. est. up 1.2%; new orders ex-trans. for Sept. rise 0.7% while new orders ex-defense for Sept. rise 1.3% after rising 1.5% in Aug; Capital goods non-defense ex aircraft new orders for Sept. rise 1.7% after rising 1.4% in Aug.
· Oil prices rise, ending the week near the highs, rising $1.10 or 2% to settle at $55.64 per barrel (off earlier lows of $54.40), closing at near 2-year highs and added 3.2% for the week. Not much this week outside of another round of bullish inventory data, and got an additional boost late afternoon after the weekly Baker Hughes rig count declined by a total of -11 rigs to 898, led by a decline of -8 oil rigs for the week. Oil now up for four consecutive weeks.
· Gold prices dropped -$8.90 or 0.7% to settle at $1,269.20 an ounce, falling as the U.S. dollar found new support from a strong reading in the services sector after the ISM reading posted its highest levels since 2005. Gold prices end at a nearly 3-month low, and down 0.2% for the week. Data has been generally strong the past few weeks (outside of today’s softer jobs report) which has boosted expectations for the Fed to raises interest-rates next month.
Currencies & Bonds
· The dollar index (DXY) traded back above the 95 level, rising about 0.3% today on mixed economic data today, falling initially on the jobs miss, but spiking after the ISM services data beat; the U.S. dollar touched highs of 114.43 vs. the yen (near July peaks), while the euro slid to around the 1.16 level. The euro posted a 0.4% loss on the week. The British pound edged up after tumbling 1.4% yesterday after the Bank of England raised its key interest rate 25 bps to 0.5% but sounded in no hurry to follow up with another increase soon. In crypto-currencies, Bitcoin at it again, rising as high as $7,448 before paring gains, posting a weekly gain of about 27%. Bonds end the day steady after early volatility as yields sank following the weaker jobs report, but spiked back after the ISM services report topped views; 10-year ended around 2.34%, 2-yr 1.61%.
Sector News Breakdown
· Retailers; mall related retailers get another piece of negative news as mall REIT CBL cut numbers and guidance; BOOT 2Q results were above plan despite the hurricanes, with strong comps and gross margin (comps increased 1.8% in 2Q); GILdowngraded to market perform at BMO Capital; FND jumped on earnings beat, analyst upgrade; tough week in general for retail, led by decline in UAA and sports apparel names
· Consumer Staples; HLF shares fall as year EPS view missed estimates; up and down week for beauty products with REV posting large quarterly loss; COTY traded to 52-week low today, though EL big jump early in the week after earnings; APRN downgraded at Barclay’s; THS downgraded by several analysts after earnings miss this week
· Restaurants; SBUX bounced off overnight losses after lowering their long-term top-line + earnings algorithm, removing nearly a year-long overhang on the stock and guiding 2018 in-line with the new algorithm; WING solid 3Q comp beat highlighted traction from national advertising and delivery; BLMN Q3 EPS missed by 3c on in-line revs and guided year profit below views;LOCO also Q3 EPS miss of 3c on weaker revs $101.2M and year guidance misses; PBPB 1c EPS beat on rev miss and comps down (-4.8%); RUTH Q3 revs miss on comp sales decline (-1.6%); CHUY moves to highs late morning after its earnings results
· Baker Hughes (BHGE) weekly total rigs fell -11 to 898, with oil rigs down -8 to 729, and gas rigs down -3 to 169, and miscellaneous rigs unchanged
· Other movers; WFT upgraded at outperform at Bernstein based on an improving business, a risked assessment of tangible improvement actions and an asymmetric risk/reward vs. current valuation; GPRE upgraded at Piper to overweight as believe the market is undervaluing the non-ethanol assets; EOG beat and production beat stale consensus, mostly due to higher NGL volumes and better NGL pricing; oil driller NE declined on earnings
· Utility sector; 52-week highs for several utilities – ED, WEC, DUK, EXC, SO, AEE (DUK and ED reported earnings results) – utility index (UTY) to record highs above 705 level
· MLPs; HEP downgraded at UBS to neutral; UBS also noted that with 18 MLPs reporting thus far, EBITDA/DCF results are running 1.5%/4.8% above their expectations, notably Harvey impacts have been less than expected/said while good for long term EBITDA, Capex for 2018 has been revised upwards
· Solar sector; Roth Capital noted the Tax Cuts and Jobs Act released from the House Committee on Ways and Means proposes cutting the 10% permanent ITC for projects that begin construction after 2027 and requires continuous construction for qualification. Overall, they see this as limited-to-no-impact for our solar coverage universe (though the latter change may be a modest negative if a bill gets passed; SPWR jumped yesterday on better earnings
· Financial stocks in the S&P 500 slipped as bond yields fell after the employment report, dragged down by AIG which also reported a sizable earning miss; AIG was downgraded to neutral at Bank America after Q3 EPS posted sizable miss as recent hurricanes took a toll on results in the commercial segment (note insurers jumped yesterday following MET, LNC, ALL, PRUbeats)
· REITs; Mall reits pressured early after CBL plunges as the company missed on FFO, cut guidance, and cut the dividend by 25% to preserve cash for redevelopment and debt reduction (shares of MAC, SKT, SPG, WPG, TCO were active)
· Mortgage insurers ESNT, MTG, NMIH and RDN downgraded to hold at Deutsche Bank saying recent strong performance leaves limited upside to target prices. While they remain bullish on the outlook for the sector, the stock prices appear to currently reflect this outlook
· Lending, Finance and Services; RMAX shares volatile after last night’s press release and 8k that revealed both Co-CEO’s are under an internal investigation over allegations of wrongdoing in employment practices and of a previously undisclosed loan of personal funds
· Healthcare; potential deal news late day after Reuters reported CVS and AET are working toward finalizing merger terms and announcing a deal by as early as December, and that a deal will “probably” value Aetna at significantly more than $200 per share, though an exact price is not yet agreed upon https://goo.gl/LJmqiJ; VRX rises as the FDA approved the company’s Vyzulta drug for open angle glaucoma; TEVA tgt cut to Street low $7 at Morgan Stanley after lowering outlook; other big movers on earnings today included PODD, GNMK, MOH, NSTG and GBT to name a few; AET upgraded to outperform at Raymond James;MOH rises to 52-week highs after earnings/sales beat
· Biotech movers; BLUE receives second analyst upgrade in as many days (Morgan Stanley upped today after BTIG raised yesterday) after the updated data ASH abstracts; NTLA shares rise as Citigroup noted the worldwide market for CRISPR technologies is expected to reach ~$10b by 2025, delivering an annual compounded growth rate of ~40% (shares of EDIT, CRSPalso moved)
· Medical devices and Equipment; BRKR upgraded to buy at Bank America after Q3 results saying recent organic revenue growth momentum will continue into 2018; PKI and MTD both slide from record highs on Wednesday after earnings overnight that came in mostly better (MTD beat but EPS growth slowed again); XRAY Q3 EPS and sales top views, but lower margins;
Technology, Media & Telecom
· Hardware; AAPL trades at new record highs after delivering upside earnings/sales surprise – overall results above expectations as iPhone shipments printed largely in-line with estimates… iPad, Mac, and sales growth in Greater China contributed to the majority of the upside surprise and September-quarter guidance is slightly ahead of consensus/ note the iPhone X debuts in stores today
· Internet; TWTR upgraded to buy with $25 target at Argus saying user engagement is improving and it is delivering strong growth in adjusted Ebitda, with a return to revenue growth expected by 2018; Pandora (P) shares drop after quarterly results missed and rev guidance $365M-$380M misses $412.9M est. (prompting several analyst downgrades)
· Semiconductors; QCOM jumped late session after Bloomberg reported AVGO is exploring a deal to acquire the company (note QCOM is currently in the process of acquiring NXPI) https://goo.gl/UXDop2; overall sector got a boost on AAPL report, as Deutsche Bank noted that comments made and the fundamental report bodes positively for most AAPL-exposed companies in their coverage, including ADI, AVGO, INTC, QCOM, TXN, and ON; CRUS results and guidance above estimates as CRUS bucks the trend of Apple suppliers who have been guiding December below estimates; AQ 6.818M share IPO priced at $9.00
· Comm equipment and services; ANET Q3 results handily top and better guidance on higher product rev, margins and opex; optical space slammed yesterday on OCLR lower guidance, while today, ACIA Q3 results beat, but guidance of 19c-36c on revs $83M-$93M came in way below the 47c/$113.1M estimates); OLED rises on earnings/guidance
· Software movers; DATA shares fell on softer Q3 results with sales/earnings modestly below expectations as a stronger-than-expected ratable contribution weighed on license sales; PCTY beat on top and bottom line (smallest beat since IPO) and guidance in-line; ATVI reversed earlier gains despite Q3 beat and raised guidance in video game sector; CTXS upgraded at Goldman; VRNS advanced after Q3 beat, upside Q4 and FY guidance; KEYW plunges on EPS miss
· Media movers; CBS mixed quarter as softer than expected Entertainment and Local Media revenues were offset by better Entertainment margins; 52-week lows in S&P for VIAB, FOX, DISCA, DISCK, IPG, OMC, CBS in the media/advertising sector – follows CBS results today, lower guidance/EPS miss this week from DISCA; RUBI sinks as much as 42% as the company said it eliminated buy side transaction fees effective Nov. 1 and reported a sharp dip in 3Q results
· Telecom; tower stocks active (AMT, CCI, SBAC) after the WSJ reported late Thursday that Sprint and TMUS are said to restart talks and could reach a deal within weeks, citing unidentified sources. https://goo.gl/K5zr9T; ATUS guided year adjusted Ebitda to low end of guidance range
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.