Mid Day Outlook: January 3, 2018

Scott GreenDaily Market Report

Mid-Morning Look
Wednesday, January 3, 18
  
Equities at new record highs again for all major averages as investors continue to pile into riskier assets to start the New Year. After failing to rally yesterday despite a jump in bond yields, financials are still lagging broader markets, while the Nasdaq Composite adds to record gains, topping the 7,050 level after closing above the 7,000 level for the first time yesterday. The dollar index rebounds after falling the last 5-session, while gold prices are currently on track for its 9th consecutive session advance. The two pieces of economic data (ISM Manufacturing and Construction Spending) both top consensus estimates, while markets await the release of the FOMC Minutes at 2:00 PM EST from its prior meeting. Yesterday was a busy day of Wall Street analyst’s positioning research ratings on sectors to start the new year, with today no different amid lots of sector calls (hospitals cautious at Goldman/Piper, E&C space positive at Baird, and a positive retail call from Wells Fargo). Monthly U.S. auto sales data also out today, with results from GM, F and FCAU out so far (more below).
 
Treasuries, Currencies and Commodities
·      In currency markets, the dollar index rebounds off 3-month lows after a strong than expected ISM manufacturing and construction spending reading this morning; the data helped, but likely just a buy on the recent pullback as the dollar has slipped five straight sessions
·      Precious metals rise as gold climbed for a ninth-consecutive session, trading at its highest since the middle of September, even as the dollar rebounds off 3-month lows
·      Energy futures extend recent gains, still at best levels in over 2 ½ years, as WTI crude tops $61 per barrel; note API inventory data to be reported tonight (pushed back a day due to New Year’s Holiday on Monday), while the EIA report due out tomorrow at 11:00 AM EST
·      Treasury markets slightly rebound, as the 10-yr yield slips 1 bps after rising over 5 bps yesterday; the 10-yr yield at 2.45%, with the 2-yr 1.92% and the 30-yr 2.80% – better economic data today
 
Economic Data
·      The December Institute for Supply Management (ISM) manufacturing index rose to 59.7, the second highest reading of the year, from 58.2 in November (which was also the estimate); sixteen of the 18 industries tracked by ISM reported growth as production rose to 65.8 from 63.9 and new orders jumped to 69.4 from 64; employment index however fell to 57 from 59.7
·      Construction Spending for November rose 0.8%, topping the 0.5% estimate while October was revised to 0.9% from 1.4%; Private construction rose 1.0% in Nov., Private residential construction rose 1.0%, Private nonresidential construction rose 0.9%
·      FOMC Meeting Minutes at 2:00 PM EST today
   
Sector Movers Today
·      Auto sector; Monthly auto sales released today; auto sales for December out: 1) GM Dec U.S. auto sales fell (-3.3%) to vs. est. down (-7.3%); 2) Ford (F) Dec U.S. light-vehicle sales rose 1.3%, vs. est. down (-1.8%) saying total car sales down (-5.5%), total SUV sales up 8.0% and total truck sales down (-1.0%); 3) FCAU said Dec U.S. auto sales fell (-11%), in-line with consensus views – reported sales of 171,946 units, an 11% decrease compared with sales in December 2016
·      E&P sector; Citigroup with several changes, as they upgrade COG & EOG to Buy and downgrade APC & CPE To Neutral – Based on valuations and other factors, we upgrade COG & EOG to Buy, and downgrade APC & CPE to Neutral; Price targets raised for COG, EOG & APC; but CPE unchanged. Top Picks For 2018 – Based on our quantitative returns-based framework, along with other factors, our top picks for the year on the large-cap side are PXD, DVN, NBL, ECA and FANG, and WPX and JAG among the small-to-mid-cap E&Ps
·      E&C Sector; Baird said they are positively biased towards the E&C sector as the industry enters 2018 with best opportunity for net backlog/earnings growth in several years. Further, at modest discount to broader market/industrials, the sector offers pockets of better relative risk/reward. Also said previous problem projects and multi-year restructuring activities are now largely completed, providing a cleaner basis for investors returning to the space OP rated on ACM &FLR(which they upgraded today) as well as MTZ/MYRG
·      Asset Managers and Brokers; Morgan Stanley raised its 2018 EPS by +13% and price targets by 16% on lower tax rates and strong equity markets – firm also upgrading APO and ETFC to Overweight with compelling valuation and catalysts, andLPLA to Equal-weight and downgrading IVZ to Equal-weight with more balanced risk/reward; Credit Suisse downgraded shares of AMG and LM based on valuation; Nomura upgraded SF and LAZ to buy in 2018 bank/broker outlook, saying they expect tax clarity to reinvigorate large / cross-border deal activity in ‘18
·      Consumer Finance and Payment systems; MGI shares fell after Ant Financial’s plan to acquire the money transfer company collapsed after a U.S. government panel rejected it over national security concerns; Barclay’s said heading into 2018, they see strong risk/reward from names with multiple expansion potential and/or material earnings upside, including ADS (which was upgraded to Overweight), PYPL, FLT, and FDC and also remain Overweight on solid compounding growth names such as V, MA, SQ, GPN, and TSS…remain sidelined, in most cases given valuation levels, on ADP, PAYX, WEX, PAY, and WU, although they see little downside risk to shares
·      Retailers; consumer discretionary sector with a big boost yesterday after strong holiday sales data recently, as several analysts with rating changes: Wells Fargo today upgraded ULTA and DKS to Outperform and downgraded TJX to Market Perform – firm said potential near-term/January catalysts and see the most bullish setup at GOOS, LULU and URBN (likely potential holiday upside could be pre-announced ahead of ICR next week) and more cautious on SIGFIVE was upgraded to buy at Deutsche Bank as firm also makes several price target changes in sector
 
Stock GAINERS
·      AMD +6%; after a report that INTC has a flaw in its products that makes commonly used operating systems vulnerable to hackers https://goo.gl/fvTrQb
·      ARNA +7%; upgraded to outperform at Wells Fargo and tgt up to $53 from $19 citing significant progress on an experimental therapy for a rare and potentially fatal disease
·      BB +7%; signed a deal with Chinese internet giant BIDU to work together on automotive software
·      CASY +7%; as activist investor JCP Investment recommends the company explore strategic alternatives, including sale
·      CMC +5%; after earnings beat
·      GLPG +3%; says it has started three new clinical trials in its cystic fibrosis (CF) program and concluded the Phase 2 FLAMINGO study assessing C1 corrector GLPG2222
·      IBM +3%; upgraded to outperform at RBC Capital as see a host of cyclical and secular levers that should enable share performance through 2018
·      SCG +22%; to be acquired by Dominion Energy (D) in a $7.9B stock deal, valuing the company at $55.35 per sharehttps://goo.gl/e5a7x5
·      VRX +6%; said it pays down additional $300M of debt
 
Stock LAGGARDS
·      CYH -7%; Goldman Sachs initiated CYH with a sell rating and $3 tgt
·      D -3%; after acquisition of SCG earlier today (details above)
·      HOG -3%; downgraded to underperform from neutral with $43 tgt at Longbow after 4Q checks revealed HOG’s U.S. retail sales are trending down 5%-7%
·      INTC -3%; after a report that INTC has a flaw in its products that makes commonly used operating systems vulnerable to hackers
·      MGI -7%; Ant Financial’s plan to acquire the money transfer company collapsed after a U.S. government panel rejected it over national security concerns
·      TDG -3%; names EVP Skulina as interim CFO as Paradie resigns
·      UHS -1%; downgraded along with HCA to neutral at Piper on belief that the consumerism of healthcare is causing a 5-10 year structural headwind for the hospital industry

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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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