Mid-Morning Look: October 2, 2018

Scott GreenDaily Market Report

Mid-Morning Look

Tuesday, October 2, 2018

U.S. equities are little changed early, taking a pause after big gains for the Dow and S&P yesterday, as U.S. stocks swing between gains and losses amid concern over political tensions with China and Italy’s fiscal woes. Small caps look to rebound after the Russell 2000 index fell nearly 1.5% as large caps have widely outperformed. A drop in the 10-year Treasury yield (10-year falls below 3.05%) is helping boost interest rate sensitive names, as defensive utilities rise, offsetting losses in consumer discretionary shares. Italian stocks have clawed back off the lows after falling sharply again on budget concerns (last week the anti-establishment government is digging in its heels after last week widening its budget deficit target for next year to 2.4% of GDP). No notable economic data today but September auto and truck sales thus far has been widely disappointing. Stocks overall pare Nafta-related gains from Monday’s session with metals falling (Deutsche cautious on steels), discretionary/retail shares slide, airlines fall after DAL narrows guidance, gold miners rise as gold spikes and semiconductors mostly higher, helping keep the Nasdaq steady.

Treasuries, Currencies and Commodities

· In currency markets, the euro and Pound under pressure this morning; note since rising above $1.18 late Sept., the euro has shed 2.5% in the past 7 trading sessions. The euro touched a six-week low against the dollar amid fresh pressure from rising Italian bond yields and a wider trend for a strong dollar (fell to low of 1.1505 before paring losses). The head of Italy’s lower house budget committee said the nation could solve its debt problems if it had its own currency (weighing on the euro). Italy’s Deputy Prime Minister Di Maio said the government isn’t willing to exit the euro or the EU. Brexit uncertainty and strong dollar drag the British pound below $1.30 to lows of 1.2941 before paring losses – its weakest level in three weeks, as investors keep close tabs on the deluge of political headlines

· Precious metals caught a bid this morning, surging $18 bucks despite a strong move higher in the dollar, helped by positive commentary from Goldman Sachs which said sees three reasons for buying gold after sell-off: 1) firm economists forecast EM growth stabilization and, despite near-term risks, maintain constructive outlook on EM currencies, 2) recent gold ETF and CFTC net specs liquidation “not the beginning of persistent DM outflows, but rather a one-off ‘cleaning up’ of speculative positions”, and 3) while opportunity costs matter, rising-rates environment not necessarily bearish for bullion – Bloomberg (gold 50-day MA resistance $1,208.60 – hasn’t closed above moving average since April)

· Energy futures small pullback after both WTI crude and Brent both traded to more than 4-year highs yesterday nervousness towards upcoming Iranian sanctions by the U.S. (not expected until November) and the impact of production losses; WTI crude holding around $75 per barrel ahead of weekly API inventory data tonight and EIA tomorrow morning

Sector Movers Today

· Retailers; PLCE was upgraded to neutral from underperform at Bank America as view PLCE shares as approaching fair value at 16x core (ex- estimated share based compensation tax benefit) FY19E EPS; SKX downgraded to neutral at Citigroup citing concerns around domestic wholesale growth and risks associated with elevated SG&A on a weaker top-line; TPR added to US 1 list at Bank America; FTD lowered guidance on the top-line for 2018, while reiterating bottom-line view

· Auto sector; monthly auto sales data released today: Ford (F) Sept light vehicle sales fell (-11%), missing the estimated decline of (-9.1%)/F-Series topped 70,000 truck mark for seventh straight month, selling 75,092 pickups during the month; note GM no longer provides monthly auto sales figures; – note numbers may be skewed due to impact of Hurricane last month; HMC posted Sept US auto sales down (-7%) vs. est. miss (-4.1%); TM Sept US auto sales fell (-10.4%) to 203, 098 units vs. est. (-6.7%); FCAU said Sept US auto sales were 199,819 vehicles, a 15% increase compared with sales in September 2017 of 174,266 vehicles, topping the 8% est.; NSANY Sept US auto sales fell (-12%), better than the expected decline of (-20%)

· Metals & Materials; Deutsche Bank turns more cautious on steel stocks as most positive data points and catalysts have largely played out as they downgrade X and RS to hold while also downgraded CENX in the aluminum space to hold due to a correction in the alumina price taking longer than expected; gold miners got a boost following a rebound in gold prices as Goldman Sachs laid out three reasons to buy gold (NEM, AEM, GG active)

· Credit cards; JPMorgan positive on the group ahead of Q3 earnings given compressed multiples, sees the potential for positive credit commentary during Q3 earnings to be a near-term positive catalyst – the firm says COF is its favorite card name through our Dec-19 and up tgt from $109 to $113) while upgrading DFS to overweight and raise tgt to $89/says AXP probably going to beat/raise but we stay Neutral on valuation and raise tgt to $115 but cut SYF tgt to $35 from $39

· Housing & Building Products; SERV downgraded at Morgan Stanley following the official spin off of Frontdoor (FTDR) from ServiceMaster, as view the valuation of SERV (now Terminix and Franchise Services Group) as fair given that the stock has re-rated significantly post the spin announcement; HOME was upgraded to buy and $41 tgt at Goldman Sachs as see an opportunity to buy into a high-potential growth franchise at a moment when recent sales misses, tariff concerns weigh on shares; BECN downgraded to neutral at Baird, moving Fresh Pick designation and lowering price target to $37 on cyclical and secular concerns; LOW added to Bank America US 1 list citing opportunity for improvement in same-store sales (comps) and operating margin; WHR and AOS weak after Goldman Sachs initiated coverage of both cos with “sell” ratings

Stock GAINERS

· CF +2%; tgt raised to $50 at RBC as expect 3Q/18 in-line with expectations as the recent run-up in nitrogen prices started towards the latter part of the quarter

· CLVS +8%; after the company’s cancer drug Rubraca got a “breakthrough therapy” designation from the FDA which could expedite the development and review of Rubraca by the FDA for BRCA1/2-mutated metastatic castration-resistant prostate cancer

· GE +3%; as analysts positive after CEO change; RBC upgraded to outperform and $15 tgt on the news of Larry Culp being named Chairman & CEO, while Wolfe also upgraded shares

· INTC +3%; as Bluefin Research said 2H production levels suggest upside to analyst revenue estimates for fourth quarter and first quarter of 2019

· LW +5%; as Q1 EPS/sales top consensus/reiterate outlook

· SEAS +1%; says total revenue is expected to increase by approximately $41M, or 9%; says total attendance increased by approximately 0.7 million guests, or 10%

Stock LAGGARDS

· BUD -1%; receives second analyst downgrade in as many days (UBS today, Jefferies Monday)

· COP -1%; downgraded to neutral at Goldman Sachs noting Since adding COP to Buy on December 13, 2017, the company has outperformed US majors by 48%, and the XLE/S&P500 by 41%/40%

· DAL -3%; narrows its Q3 EPS view to $1.70-$1.80 from prior $1.65-$1.80/September load factor 83.6% and sees 3Q pre-tax margin about 13%, saw 12% to 14% (leads airlines lower)

· EW -4%; downgraded at both Guggenheim and Bank America as each see little upside as current P/E multiple on 2019 earnings seems full

· MDB -4%; downgraded to reduce at Nomura as believe the current market value reflects extreme valuation

· PEP -2%; as posted modest Q3 beat on EPS and sales amid tax-driven earnings beat; posted another quarter of weak North American Beverage operating profit while lowers year core EPS to $5.65 (from $5.70) but boosts year organic sales view to at least 3% from prior 2.3%

· SFIX -31%; in-line quarter fails to top estimates while Piper noted sales modestly missed on much lower new customer adds in the quarter; sees Q1 revenue $354M-$360M vs. est. $359.16M

 

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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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