Mid Day Outlook: December 4, 2017

Scott GreenDaily Market Report

Mid-Morning Look
Monday, December 4, 17
  
A very volatile day to for U.S. stocks, with financials, transports, consumer discretionary leading the way higher, as investors assess which sectors stand to benefit most from changes to the tax code as the House and Senate are set to begin working on compromise legislation Monday. On Saturday, the Senate passed a sweeping tax-code overhaul almost entirely along party lines. Senate passage brings Republicans closer to its goal, but the version passed differs in some respects from the House’s. The two chambers must agree on a single bill before sending it to Trump for signature. Following the news, markets surge for the most part, with the Dow Industrials up almost 300 points, though the Nasdaq remains flat to down (about 60-points off earlier highs of 6,899) as investors rotate out of the big winners this year (such as semiconductors) and into sectors seen as benefitting the most from the tax reform (financials, retail, restaurants, some healthcare, chemicals – details below). Transports extend record gains as well as index up around 3% or 300 points, topping the 10,500 level. Commodities lower given the rally in the dollar, while M&A (CVS/AET deal) also boosting market sentiment.
 
Treasuries, Currencies and Commodities
·      In currency markets, the dollar getting a boost on tax reform optimism, as the dollar index (DXY) rises 0.4%, with the euro and yen falling; the British Pound slips back to flat around 1.3477 (off overnight highs 1.3539 and lows 1.342) on Brexit talks in Brussels; Bitcoin up over $400 or 3.9% to $11,323 (touched earlier highs $11,845
·      Commodity prices broadly lower, led by declines in energy (gasoline, oil, natural gas) and precious metals (gold, silver -0.5%) following the rise in the US dollar
·      Treasury market’s fall as yields rise after the Senate over the weekend passed its version of tax legislation, stoking growth and inflation expectations; the 10-year Treasury yield up 2.5 bps to 2.385% while the 2-yr yield adds nearly 4 bps to 1.80%
 
Economic Data
·      Factory Goods Orders for October fell (-0.1%), better than the expected (-0.4%) decline as new orders ex-transportation for Oct. rise 0.8% and new orders ex-defense for Oct. rise 0.2% after rising 1.7% in September; durables orders for Oct. fall 0.8% after rising 2.4% in Sept.
   
Sector Movers Today
·      Transports; KSU added to the US1 list at Bank America, highlighting it as a top pick in Transports; Deutsche Bank said it is applying a more stringent approach to stock selection in 2018- balancing the cyclical exuberance of near-term fundamentals with the structural realities of returns over a cycle – the firm upgraded UPS to buy with $135 tgt while downgraded ODFL to sell and maintains sell rating on CNI; in airlines, Global demand for air travel climbed 7.2% in October, rebounding after September was disrupted by hurricanes, the IATA said; DAL said November load factor rose from a year ago (85.4% vs. 85% YoY), as traffic growth outpaced an increase in capacity
·      REITs; Raymond James updated estimates for each of the ”Big Three” healthcare REITs (HCN/VTR/HCP) following 3Q17 results, while also downgrading VTR to Underperform citing view of a more challenging outlook for its domestic seniors housing operating segment and rich valuation; SunTrust increasing price targets forDCT to $60 from $56, REG to $74 from $71, and WSR to $14 from $12; Bank America upgraded ARE and CUZ to buy from neutral; downgraded OFC to neutral andPSA to underperform; Evercore/ISI upgrades 10 REITs (BDN, ESRT, OFC, PLD, PK, DRH, ELS, SUI, AMH, LSI) and downgrade three (DDR, VNO and CLI)
·      Chemicals (SHW, CF, AGU) seen to benefit lower U.S. corporate tax rate, as all of these stocks generate more than 60% of sales in U.S. according to Citigroup (notes the U.S. Senate’s tax bill lowering corporate tax rate to 20% from 35%, effective in 2019, would strongly benefit companies with an outsized footprint in U.S.)
·      Industrial & Machinery; RBC Capital said DLPH is well positioned as OEMs move to adopt advanced powertrain technologies/moreover, growth accelerates beyond 2020 as propulsion becomes more electrified; distributors outperformed early (FAST, GWW) as RBC Capital said U.S.-centric distributors best positioned to benefit from tax reform, foreign domiciled worst placed with biggest winners to include AQUA, GWW, HDS, ATKR
·      Cable; Barclays’s downgraded the U.S. cable and satellite communications industry to neutral and also downgraded CHTR to underweight as now sees headwinds including competitive pressure in video, a slowdown in broadband growth, levered balance sheets, more uncertainty on M&A payoffs and optimistic valuations;CMCSA said at UBS conference that it sees Q4 broadband additions ahead of expectations
 
Stock GAINERS
·      AET +1%; CVS will buy AET for about $67.5 billion, paying $207 per share in cash and stock ($145 a share in cash) – $77B including debt https://goo.gl/qYL7zS 
·      APRN +20%; upgraded to equal-weight at Barclays saying risk/reward appears more favorable
·      BGC +32%; as Italy’s cable maker Prysmian SpA said that it will acquire BGC for $30 a share, in a deal that values the latter at approximately $3 billion.https://goo.gl/BtTb53
·      CCJ +16%; after world’s number 1 producer, Kazatomprom, announced another production cut which is expected to reduce supply by 20%
·      EXAC +16%; said TPG Capital raised its offer to buy the company to $737M cash for a revised offer of $49.25 (from $42 on Oct 23rd)  https://goo.gl/f5BQ2g
·      GWW +5%; distributors outperformed early (FAST, GWW) as RBC Capital said U.S.-centric distributors best positioned to benefit from tax reform
·      INFY +4%; announced Salil Parekh as its new CEO (was a member of Capgemini’s executive board)
·      M +7%; breaks above technical resistance levels as retailers extend gains (consumer discretionary getting a lift on tax reform hopes)
·      RIOT +7%; said it has closed a CAD$10.5 million investment in its Coinsquare holding, led by an unnamed global asset manager with more than a trillion dollars in assets under management
 
Stock LAGGARDS
·      AMD -5%; broad based weakness early in semiconductor stocks in rotation out of winners
·      CVS -2%; as agreed to buy AET in $67B deal
·      EA -2%; weakness in software sector as tech not seen as direct beneficiary to tax reform
·      FNSR -6%; downgraded to buy at Needham on Data Center market concerns ahead of earnings this week
·      RARX -31%; as Piper said data ‘underwhelms’ compared to ALXN’s Soliris
·      TMO -3%; as Leerink cut tgt to $200 from $216 as gets cautious on risk to its Lab Products and Services business
 

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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.
 

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