Market Review: December 5, 2017

Scott GreenDaily Market Report

Closing Recap
Tuesday, December 5, 17
  
Equity Market Recap
·      U.S. stocks fade late day, as the early rebound in technology following NASDAQ’s 1% decline yesterday fizzled out, with the Composite falling more than -60 points of its intraday highs to end lower along with the Dow and S&P 500. Shares of recent winners such as Transports, Utilities, and Telecom reversed, sending major averages lower, while softer earnings out of homebuilder Toll Brothers (TOL) hit that sector and retailers took a breather following strong returns after the Senate Republicans passed their version of the tax reform bill. Markets now eagerly await the progress in the country’s tax reform. The Senate and House are hoping to finalize a combined bill and send to President Trump after the U.S. Senate on Saturday morning narrowly passed the Republican bill to overhaul the tax code. The move followed the House passage of its own version of tax reform legislation last month, which contained significant differences from the Senate version. Also today, investors got a weaker services index reading (ISM) and trade deficit data, which coupled with a weaker stock market boosted bonds, while the dollar ended higher. The stronger greenback weighed on gold prices (falling to 4-month lows), while oil prices were little changed ahead of inventory data tonight and tomorrow.

Economic Data
·      ISM Non-Manufacturing for November falls to 57.4, below est. 59 and below prior months 60.1 reading; non-manufacturing index at 57.4 vs 60.1 prior month; Business activity fell to 61.4 vs 62.2 prior month; new orders fell to 58.7 from 62.8 prior while employment fell to 55.3 vs 57.5; prices paid fell to 60.7 vs 62.7 and backlog of orders fell to 51.5 vs 54
·      The U.S. trade deficit grew 8.6% in October to 9-month high of (-$48.7 billion), wider than economist expectations of (-$47.5B). Imports climbed 1.6% to a record $244.6 billion. Exports were unchanged at $195.9 billion
·      Nov. Composite PMI 54.5 vs. Flash Reading 54.6 as index falls to 54.5 from 55.2 in Oct (and compares to year ago 54.9); the US Markit Service PMI also 54.5 vs. 55.3 last month
 
Commodities
·      Oil prices held a tight trading range today, with WTI crude rising 15c, or 0.3% to settle at $57.62 per barrel rebounding after yesterday’s declines. Oil prices have been volatile of late after OPEC’s agreement to extend production cuts through next year provided support, but also raised expectations for growth in U.S. shale output. Inventory data coming up tonight (API) and tomorrow morning (EIA)
·      Gold prices slide to 4-month lows, dropping -$12.80 or 1% to $1,264.90 an ounce, its lowest settlement since August 8th in a broad move lower for metals (both precious and industrial) given the stronger US dollar. Copper futures slumped to a 3-month low, falling over 4% on worries over China’s economic growth and rising inventory concerns
 
Currencies & Bonds
·      The U.S. dollar gained, as it maintained its strong returns post tax-legislation passage in Senate as now markets await finalized bill between both chambers hopefully this week. The dollar index quietly climbed throughout the session, up over 0.2% midday to 93.40 level. The Pound fell to lows of 1.3371 overnight amid weak sentiment stemming from Brexit headlines, but pared losses throughout the day. The Aussie dollar briefly touched a three-week high after retail sales beat and the central bank held rates unchanged. Bitcoin mania continues, rising to fresh record of $11,864 today before paring gains. Emerging-market currencies pared earlier gains as the U.S. dollar advanced among most major peers.
·      Bond markets end little changed despite weaker-than-expected economic data, while stock averages are were mixed; the 10-yr yield topped 2.38% earlier from a 2.372% close yesterday, but ended back near those levels; the 2-yr yield keeps climbing, trading above 1.83%, though the 3o-yr yield remains weak at 2.74%
   
Sector News Breakdown
Consumer
·      Auto sector; auto parts retailers higher early after AZO Q1 comp sales of 2.3% topped the 0.9% estimate on better EPS/sales/margins noting storms and natural disasters during the quarter hurt EPS by about 7c (ORLY, MNRO, AAP also moved in sympathy); Morgan Stanley  raised targets on auto suppliers AXL to $16 from $11, keeps underweight; raises BWA PT to $38 from $32, retains underweight; raises MGA PT to $49 from $47, maintains equal-weight; Ford (F) said by 2025 plans to introduce more than 50 new vehicles in China, and boost China revenue by 50% above this year/new vehicles include eight all-new SUVs and at least 15 electrified vehicles
·      Retailers; after surging the last few days on hopes the tax reform bill will help consumers, retailers giving back some gains today;  JILL shares jumped as the women’s apparel retailer posted Q3 earnings that beat on a smaller comp sales loss (-0.6% vs. -3.7% est.); BKE announced a special dividend of $1.75 per share;ASNA shares fell after the owner of Justice and Dressbarn posted a larger comp sales decline (-5%) for Q1 on in-line earnings, but sees Q2 loss more than Street estimates; shares of LE and GII also higher early after earnings results, while FRAN slipped
·      Restaurants; MCD was upgraded to buy at Jefferies and raised tgt to $200 from $150 saying the company is well-positioned to continue to outperform and gain share; MCD also announced overnight its new $1 $2 $3 Dollar Menu, which will kick off the New Year; SBUX is opening its biggest cafe in the world in Shanghai on Wednesday, a 30,000 square-feet store and said it sees China surpassing the U.S. as its largest market within a decade
·      Housing & Building Products; homebuilders pressured after TOL Q4 EPS and revenue results fell short of Wall Street expectations, while 4Q was mixed, with robust order growth and generally in-line guidance offset by modestly lower-than-anticipated gross margins in FY18 guidance (shares of LEN, PHM, KBH, MTHwere active)
·      Movie theatres; Cineworld Group PLC has agreed to buy RGC for $3.6B, creating the world’s second-largest cinema operator with more than 9,000 screens.https://goo.gl/nYi2kk ; HMNY (which is buying majority stake in MoviePass) shares fell after CNK became the first major exhibitor to offer a subscription service – the Cinemark Movie Club offers one 2-D ticket per month for $8.99, concession discounts and reserved seats
·      Gun stocks; sector was active (AOBC, RGR, VSTO) ahead of House vote on the concealed carry bill, which would amend federal criminal code to allow concealed transport of handguns across state lines.
 
Energy
·      Energy stocks were mostly lower, giving back some recent gains especially in the drilling and services sector; refiners outperformed; ANDV held investor day presentation today; STO submitted its plan for the development and operation of the Johan Castberg project in the Barents Sea, a 49 billion Norwegian kroner ($5.9B) project that is thought to hold recoverable resources of between 450M-650M barrels of oil equivalent. https://goo.gl/fKX45Q
·      MLPS; KMI provided 2018 financial guidance nearly in line with Street views; Citigroup upgrading both NS and NSH on the thesis that the company will take corporate action to address its capital needs, distribution policy, and corporate structure.
·      Utilities; EIX shares dropped on concerns after reports of a fast-moving fire in Southern California’s Ventura County that began late Monday has led to at least one death and the evacuation of about 1,000 homes so far, according to authorities; the utility index (UTY) dropped below the 700 level for the first time in about a month
 
Financials
·      Large Cap banks have had a tremendous “run” the last two-weeks on tax reform optimism, were mixed today; RF said at conference sees full-year average loans expected to grow low single digits, ex. impact of 3rd-party indirect-vehicle portfolio; reports overnight that DB received subpoena from Mueller on Trump accounts; WFC CEO optimistic about economic growth amid tax reform; JPM CFO said sales and trading revenue down 15% so far YoY at conference; BAC CEO said at conference that sales and trading revenue down about 15% QTD; BAC announced a $5B stock buyback plan; BMO reported a smaller Q4 profit as declines from its wealth management and capital-markets businesses weighed on its results; 52-week highs today for several financials in the S&P 500: RF, DFS, CME, STI, PGR, AXP, ZION, TROW
·      Payments & Services; ADP was upgraded to buy at Bank America and raised its price target to $131 from $116 based on improved risk/reward; MA announces new $4B share repurchase program; raises quarterly dividend 14% to 25c from 22c; FLT and WEX tgts raised at Deutsche bank while SunTrust also positive on FLT following an investor meeting with FleetCor’s CEO and CFO saying growth opportunities remain
 
Healthcare
·      Pharma and Managed care; RVNC shares jumped on positive results from two Phase 3 clinical trials, SAKURA 1 and SAKURA 2, both meeting their primary endpoints (shares of AGN dropped after RVNC reports Botox competitor); HRTX 9.678M share Spot Secondary priced at $15.50; GALT shares plunged saying its GR-MD-02 therapy did not meet its primary endpoint in a mid-stage clinical NASH trial; COLL entered into a pact with DEPO on its top-selling drug Nucynta in the U.S. where COLL gets commercial rights to drug and DEPO royalties
·      Biotech movers; attention turns to the upcoming ASH conference this weekend with plenty of news seen in CAR-T space with JUNO’s JCAR017 efficacy/safety update in NHL, BLUE bb2121 update in multiple myeloma, GLYC’s Phase I/II durability and survival update for GMI-1271; in news, SNSS announced the resignation of the company’s CEO ate yesterday
 
Industrials & Materials
·      Industrial & Machinery; heavy duty truckers (CMI, NAV, PCAR) active after Wells Fargo noted November Class 5-8 truck orders increased 44% yr/yr but decreased 5% from prior month. ACT Research estimates November Class 8 orders were 32,900. Class 8 orders decreased 9% from October (slightly below the 7% average sequential decrease over the last ten years) but increased 69% yr/yr from weak 2016 comparisons; HDS rises as Q3 results topped estimated and Q4 guidance topped mid-point of estimates
·      Transports; sector bounce off the lows of 10,265 just a day after hitting all-time highs of 10,504 early yesterday before market faded; likely profit taking after big surge the last few days
·      Metals & Mining; VALE upgraded to outperform at Credit Suisse citing positive structural changes in the commodities space in China and well-qualified management; CLF reports offering of $400M senior notes due 2024; copper prices tumbled to 3-month lows on China fears, weighing on names like FCX, as well as industrial metals in general (aluminum, iron ore, steel)
·      Paper & Packaging; BMS has recruited Goldman Sachs to explore options of a sale, the New York Post reports, citing sources. https://goo.gl/UPbF4G
·      Aerospace & Defense; Bernstein said Defense earnings and free cash flow should benefit substantially in the near term from Senate and House bills that lower the corporate tax rate from 35% to 20%. Large US defense companies currently pay effective tax rates of 25 to 30% (GD, NOC, LMT, LLL, BA)
 
Technology, Media & Telecom
·      Internet; SNAP was upgraded to Overweight at Barclays and raised its tgt to $18 from $11 saying with the company’s pricing transition in the later stages, Snap may start hitting or exceeding consensus revenue estimates and accelerating growth in 2018; EXPE downgraded to hold at Argus which reflects the company’s reduced 2018 guidance and prospects for increased spending on employee compensation, technology, and marketing next year; GDDY 7.28M share Spot Secondary priced at $47.32
·      Software movers; COUP reported another beat and raise quarter in F3Q18, including an impressive 15% beat to billings forecast (+36% y/y), but analysts noted may not be enough given high valuation; INTU will acquire startup TSheets for about $340M adding time-tracking and scheduling tools to its lineup of software for small businesses; HUBS mentioned cautiously by Citron Research’s Andrew Left
·      Media & Telecom movers; DISH Chairman Ergen steps aside as CEO, COO Carlson promoted; MSG was downgraded to equal-weight at Morgan Stanley saying discount has narrowed, shares have outperformed, and the investment thesis may be shifting from strategic optionality to venue expansion; FOXA shares were active after CNBC’s David Faber reported the media and entertainment company could be closing in on a deal to sell its film studio and TV production assets toDIS https://goo.gl/nfahpQ

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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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