Market Review: December 21, 2017

Scott GreenDaily Market Report

Closing Recap
Thursday, December 21, 17
Equity Market Recap
·      Stocks erased yesterday’s modest declines, trading within a few points of record highs for most stock averages, as rotation into sectors that are seen as tax cut beneficiaries such as financials and energy, along with Telecom and cable (as lower tax rate can help free cash flow) continued. Small cap stocks once again outperformed while technology lagged. Energy was the biggest sector gainer, helped by a reversal in oil to the upside, while investors also look to buy beaten up sectors heading into the final week of the year. Economic data disappointed for the first time in over a week as Q3 GDP remained above 3%, but slightly below the prior month while inflation data was revised lower (and jobless claims rose). Trading volumes remained light ahead of the Christmas holiday. There were a handful of earnings results moving shares (last round of earnings until the new year, with a very quiet week coming up after Christmas), as retailer BBBY drops on margin concerns, while footwear retailer FINL jumps on boosted guidance (ahead of NKE results tonight). Much of the market activity over the last week. With the FOMC rating and tax reform bill passage in the rear-view mirror and earnings essentially over for the rest of 2017 (after tonight), expect quiet markets and low volumes over the next week as investors look to protect their gains for the year (Dow up 25%, S&P 30% and Nasdaq 29% YTD).
·      Republicans in the U.S. Congress advanced stopgap legislation to keep the federal government operating past Friday when funding expires, seeking to avert a gov’t shutdown. The House of Representatives voted to begin debate on a bill that would keep federal agencies running at current funding through Jan. 19 and avert a shutdown. A final House vote was set for later on Thursday and the Senate was expected to take up the measure on Thursday night.

Economic Data
·      GDP little lower; the U.S. economy’s pace of growth in Q3 was lowered slightly to a 3.2% annual rate from 3.3% under the government’s final revision to gross domestic product (GDP) after the economy expanded at a 3.1% rate in Q2; the downgrade in GDP reflected slightly less consumer spending in the July-September quarter than previously estimated. Consumer spending was revised down a tick to a still solid 2.2% rate
·      Weekly jobless claims rose by 20,000 to 245,000 in the latest week, topping the 233,000 estimate; the 4-week moving average increased by 1,250 to 236,000; continuing claims, or number of people already collecting unemployment benefits rose by 43,000 to 1.93 million
·      The Philadelphia Fed’s Manufacturing Business Outlook Survey jumped to a reading of 26.2 in December from 22.7, beating the consensus forecast of a slight downtick to 21.8. The new-orders gauge of the index surged to 29.8 from 21.4, a positive signal about future activity
·      FHFA Home Prices for October rises 0.5% vs. est. Up 0.4% and home prices rose 6.6% YoY
·      WTI crude settles higher at $58.36, up 27c or 0.46%, while Brent crude climbed 34c or 0.53% to settle at $64.90 per barrel. Oil prices recovered off earlier lows of $57.63 per barrel to end higher amid backdrop of strong refinery demand and falling crude inventories. Brent was active after the operator of Britain’s Forties pipeline in the North Sea said it was expected to restart in early January after repairs over Christmas. Both benchmarks were trading at their highest since Dec. 12 after rising most days since the start of the Forties shutdown. Gold prices reversed earlier losses to settle higher by $1 at $1,270.60 an ounce. Overall a strong week thus far for gold given dollar weakness and a rebound off 6-month lows late last week.
·      After falling most of the week, the dollar was little changed on the day, with the dollar index (DXY) steady around the 93.30 level; the greenback was mildly higher against the British Pound, while steady against the euro ahead of elections under way in Spain’s Catalan region, an event that could end up pressuring the single currency. The dollar firmed vs. the Japanese yen after the Bank of Japan left key interest rates unchanged. Emerging-market currencies fell from a three-year high following a corruption probe in Mexico to presidential impeachment in Peru. The Mexican Peso fell over 1% on the day
Bond Market
·      Bonds pare recent losses, snapping its 3-day losing streak that saw yields surge across the board (10-yr highest levels since March, 2-yr back to 9-yr highs); bonds got a small reprieve after a GDP revision that was slightly below estimates; also, selling pressure abates as the tax bill and FOMC rate hikes are in the rear-view mirror; 10-yr down 2 bps from 2.5% yield yesterday, with 2-yr holding around 1.86% and 30-yr at 2.85%
Bitcoin and Blockchain
· with a good synopsis of latest craze in the industry, noting microcap companies are increasingly announcing rebranding’s and strategic shifts towards cryptocurrency and blockchain businesses as they look to capitalize on bitcoin’s price surge in 2017. Today’s mover was LTEA changed its name from “Long Island Iced Tea Corp.” to “Long Blockchain Corp.”; on Wednesday, SSCannounced a 27% purchase of The Delaware Board of Trade Holdings, a blockchain-based alternative trading system fully licensed by the SEC; last Friday, LFIN announced the acquisition of, a blockchain-empowered solutions provider that offers microfinance lending against collateralized warehouse receipts in the form of Ziddu Coins; in October, Bioptix announced it was changing its name to Riot Blockchain (RIOT) in line with a shift in direction to become a strategic investor and operator in the blockchain ecosystem with a focus on bitcoin and Ethereum/RIOT also made a strategic investment in blockchain technology company Verady in November; NXTD up e the last 2-days after its FitPay unit and Cascade FinTech to create platform for connecting cryptocurrencies to the Payment Ecosystem. Crazy moves in names without much substance to them at this point!
Sector News Breakdown
·      Retailers; footwear in focus today with FINL Q3 earnings topping analysts’ estimates (on surprise positive comp sales of 0.8% vs. est. -4.5%) and also raised its FY18 adjusted EPS forecast to 59c-67c from previous guidance of 50c-60c; later tonight, Dow componentNKE to report earnings; in auto retail, KMX said Q3 used car sales in comparable stores grew more slowly than expected (rose 2.7% vs. Bloomberg est. 4.75%) – shares of LAD, ABG, GPI, PAG were active
·      Consumer Staples; in food, CAG quarterly sales, profit beat on hurricane-fueled demand, as EPS beat by 3c and said it now sees year sales and earnings near the high end of views; COTY was upgraded to Outperform at RBC Capital, stating after mgmt meetings/more constructive on the company and its opportunity to improve its top line and expand margins; NSRGY aims to sell its U.S. confectionery unit by the end of March ; GNC said to exchange $98.9M in convertible senior notes due ’20 for 14.6M shares; LTEA shares surged as much as 500% as it announces rebrand name change to “Long Blockchain Corp.”
·      Housing & Building Products; in household retail, BBBY Q3 sales and EPS topped estimates and comp sales of (-0.3%) was better than the (-2.5%) forecast, though analysts note margins and operating income dollars continue to face pressure; in building products,APOG shares fell after the company reduced its EPS view for year citing “lower than expected volume and pricing, particularly in architectural glass” and higher-than-expected health-care costs; homebuilder HOV reported Q4 EPS and revenue well above consensus views
·      Casino, Lodging & Leisure; Wolfe Research upgraded the lodging sector from Market Weight to Overweight and upgraded H from Peer Perform to Outperform $90 tgt and WYN from Underperform to Peer Perform w/ ~$106 fair value both entirely on valuation & tax reform – and firm also raised targets on other lodging names (MAR, HLT); in gaming, BYD added a 5th property to its December buying spree, announcing its intent to acquire Valley Forge Casino in PA
·      Utilities; it has been a rough week of sledding for the utility sector, falling amid rising rates making defensive/high dividend paying sectors less appealing; PCG shares dropped as it suspended its dividend amid potential liabilities for October’s Northern California wildfires
·      Oil & E&P sector; COG agreed to sell its Eagle Ford assets (Q3 production of 15,656 BOE/d and 74,500 net acres) to Venado Oil & Gas for $765M as based on its current oil price outlook/COG expects to record a ~$270-280M non-cash, after-tax impairment on the Eagle Ford assets in Q4 ’17; CVX trades to more than 3-year highs after Cowen raised its target to $160
·      Other movers/news; RIG said harsh environment semisubmersible Transocean Spitsbergen was awarded a 22-well contract with an estimated duration of 33 month valued at about $286M
·      Large Cap/Regional banks and Consumer Finance names have been among the top gainers over the last few weeks on tax reform – several analysts have raised ratings, targets and estimates, with the latest coming from: 1) Wedbush saying banks stand to benefit significantly from corporate tax reform in terms of 2018E EPS (they upgraded TCBI and RF to outperform, while cut STI on valuation); 2) Buckingham boosted 2018 EPS estimates for financial companies across its coverage are by median 10% to reflect materially lower tax rates and raised PTs by 18% (also upgraded JPM and WFC to buy); note WFC and FITB each announced pay increases for employees and a one-time bonus when tax plan implemented
·      Puerto Rico banks; Citigroup with a note today on banks as they upgraded FBP to buy with $7 target and initiated BPOP with a buy and $47 tgt noting they trading at 77% and 61% of tangible book value, overly discounting hurricane impacts and exposure to Puerto Rico economic weakness. Largest PR Banks — BPOP and FBP are the largest PR banks with 51% and 16% bank asset market share, respectively. Both banks are well positioned to maintain lower funding costs and benefit from the post-hurricane recovery
·      Brokers, payment services/systems; ETFC said it will allow customers to trade bitcoin futures from CBOE Global Markets Inc., joining competitors in offering the contracts after monitoring their debut earlier this month; PAYX a mover after earnings and guidance;NXTD and NETE shares extend gains, adding to Wednesday’s 75% rally (for NXTD) and 272% rally (for NETE)
·      Finance and Lending; FHFA, Treasury Dept. agreed to reinstate $3B capital reserve amount under the Senior Preferred Stock Purchase Agreements for Fannie Mae and Freddie Mac in Q4
·      Pharma/Biotech movers; BIIB shares slipped after saying its Alzheimer’s disease drug trial will continue to 18 months, as planned as its Adaptive Phase II study of BAN2401 criteria at 12 month analysis did not meet primary endpoint; IONS said it earns milestone payment from Janssen associated with initiation and enrollment in a newly initiated Phase 1 clinical study of IONIS-JBI1-2.5Rx; ADXSshares active after earnings results overnight; LCI shares fall after a competitor received FDA approval yesterday of a nasally-delivered cocaine solution, a possible rival
Industrials & Materials
·      Industrial & Machinery; in Aerospace, WSJ reported that Boeing (BA) has been in takeover talks with Brazilian aircraft maker Embraer SA (ERJ), a move that would strengthen Boeing’s hand in the regional jet market; (the two companies confirmed they were talking later this afternoon following the WSJ report); tgts raised at KeyBanc for MTZ and DY as came away from meetings with an affirmation that telecom/5G is a stand-out positive theme for E&Cs in terms of growth momentum for 2018, with tax reform an added EPS/customer capex tailwind
·      Transports; after trading to record highs yesterday on the back of better FDX earnings and revenues, the transport index took a breather today; shares of airlines outperformed led by gains in JBLU, ALK, UAL (all up over 2%) while KSU, JBHT and R were the top decliners
Technology, Media & Telecom
·      Internet; TWTR pulls back from 2-year highs after recent stock spike on heels of analyst upgrade over the last week; in online travel, KeyBanc said while fundamental crosscurrents in online travel are likely to persist in 2018, they remain more constructively bent on the space as we believe healthy skepticism is reflected in stocks – the firm lowers estimates on EXPE with updated TRVG views but remain Overweight on risk/reward and said warming to PCLN…think TRIP’s fundamental struggles should continue and said SABR’svaluation is compelling,
·      Media & Telecom; cable stocks outperformed, led by gains in CHTR and CMCSA following views that tax reform and lower corporate rates will help industry; FOXA was downgraded at Evercore ISI citing the stock’s rally post the DIS deal announcement; CMCSA joined AT&T yesterday in announcing a one-time bonus to its employees one tax plan is implemented

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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