Market Review: October 2, 2018

Scott GreenDaily Market Report

Closing Recap

Tuesday, October 2, 2018

Equity Market Recap

· U.S. stock markets again finished mixed, as the Dow Industrial Average traded to a new all-time high, topping the prior 26,769.16 best level and rising to an intraday record high of 26,824.78 before paring gains. Meanwhile, the tech heavy NASDAQ declined (falling back below the 8,000 level) and the SmallCap Russell 2000 dropped more than 1% for a second straight day, failing to rally with large caps. U.S. markets got a boost yesterday on news of a new Nafta deal between the U.S., Canada and Mexico, but saw some profit taking today as markets still deal with concern over political tensions with China and Italy’s fiscal woes which dragged the euro and European markets lower. A drop in the 10-year Treasury yield (10-year falls below 3.05%) boosted interest rate sensitive names, as defensive utilities rise, partially offsetting losses in consumer discretionary shares. Federal Reserve Chairman Jerome Powell on Tuesday said he did not see signs that inflation would spike despite the low unemployment rate.

· The Dow Industrials once again got a boost from BA, also trading at new all-time highs, up for a 4th straight day, getting a boost on positive global trade developments, while INTC, CAT, WBA, WMT also adding gains. Stocks overall pare Nafta-related gains from Monday’s session with retailers among hardest hit following the move by AMZN to raise US minimum wage for workers to $15 (shares of RL, KSS, JWN, ANF, M, GPS, UAA drop), metals fall as Deutsche cautious on steels, airlines fall after DAL narrows guidance, gold miners rise as gold spikes; AAPL shares traded to new all-time highs.

· In foreign markets, Brazil markets surge around 4% after a poll showed increased support for far-right presidential candidate Jair Bolsonaro and higher disapproval ratings for the Workers’ Party’s Fernando Haddad. In Europe, the stories remain Italy (budget concerns) and UK (Brexit talk) as European stocks fell to a two-week low amid a looming showdown between the EU and Italy’s populist government on fiscal spending. Deputy Prime Minister Luigi Di Maio said his government wouldn’t back down from a proposed budget deficit of 2.4% of GDP, amid fears Italy’s public finances are unsustainable.


· Precious metals outperform today in the commodity complex, with December gold rising $15, or 1.3% to settle at $1,207 an ounce – a near 2-week high (off earlier highs and just below the 50-day MA resistance $1,208.60 – a technical level it hasn’t closed above since April). Gold got a boost after a positive trading call 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. Jitters surrounding Italy’s financial also played a role in the strength in gold. Note gold futures fell 4.6% in Q3 and is down roughly 7.5% for the year so far amid a rebound in the dollar and stocks trading at record highs.

· Oil prices end down slightly, pulling back for both WTI crude and Brent from more than 4-year highs yesterday as nervousness towards upcoming Iranian sanctions by the U.S. (not expected until November) and the impact of production losses have helped keep prices moving higher. WTI crude dipped 7c to $75.23 per barrel ahead of weekly API inventory data tonight and EIA tomorrow morning.

Currencies & Treasuries

· The dollar was mostly higher, advancing against the Euro and Pound; 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) and is down over 2.5% from its September highs. 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). As for the Pound, Brexit uncertainty and strong dollar dragged the British pound below $1.30 to lows of 1.2941 before paring losses – its weakest level in three weeks. The Argentine peso rose nearly 4% to 38.10 vs. the US dollar. Overall, the dollar index rose for a 5th straight day (longest winning streak since May) and back near 6-week highs. Treasury prices advanced on Tuesday, sending yields lower across the board, pulling back as concerns in Europe (Italy budget and Brexit concerns), as the 10-year yield dropped to 3.06%, 2-year steady a second day at 2.82%. No major economic data today to move bond markets, though there were a few Fed speakers.

Sector News Breakdown


· Retailers; retailers broadly lower as AMZN said it was raising its minimum wage to $15 and advocating for a broader rise in the minimum wage to that level (KSS, JWN, GPS, M fell); 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; SHOO shares fell for an 8th day (analysts have warned of potential tariff impact)

· 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%)

· In other auto news; TSLA says produced 83,500 vehicles in Q3, doubling its total in the prior three months and of those deliveries, 55,840 were Model 3 sedans, in the range of what Tesla; Wolfe Research downgraded auto dealer sector to underweight from market weight while downgrading shares of AN and to underperform and LAD to peer perform; RACE tgt raised to $140 at Morgan Stanley with bull case $200

· Consumer Staples; PEP 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%; KR and WBA have partnered to pilot a new store format that will bring together Kroger’s grocery business and Walgreens’ pharmacy business; LW Q1 EPS/sales top consensus/reiterate outlook; BUD receives second analyst downgrade in as many days (UBS today, Jefferies Monday); tobacco names were active (PM, MO) after CNBC reported FDA seizes ‘more than a thousand pages’ of documents in surprise inspection of e-cigarette maker Juul

· 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

· Casino & Leisure movers; SEAS rises as says total revenue is expected to increase by approximately $41M, or 9%; says total attendance increased by approximately 0.7 million guests, or 10%; SunTrust initiated gaming names: buy rated on SGMS, AGS, BYD, CZR, GLPI, ERI, PENN; PENN and PNK said FTC settlement requires the companies to divest assets to Boyd Gaming for merger to be approved


· Energy stocks were mixed, slightly pulling back after rising the last few weeks alongside a jump in oil prices which touched 4 ½ year highs yesterday for WTI crude and Brent; COP was 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%

· E&P sector/Equipment movers; REI was downgraded to neutral at Seaport Global saying that Ring’s 2018 hz. San Andres completions have been underperforming older vintages by approximately 25%; NOVwas upgraded to buy by Johnson Rice and tgt to $55 from $50; FETwas upgraded to overweight at Piper as valuation relative to capital equipment peers screens adequately attractive to justify an Overweight.

· Utilities & Solar; utilities were higher as dividend paying sectors got a boost after Treasury yields pulled back; Raymond James adjusting 3Q, 4Q, and full-year 2019 estimates for selected companies in our clean tech coverage – as well as making two opportunistic rating changes, both of them in the water tech space as they upgrade AQUA to strong buy and downgraded WAAS to outperform


· 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

· Payroll/data processing; PAYX said Q1 payroll service revenue was tempered by the composition of processing days compared with the same period last year/ 1Q payroll service revenue rose 1% y/y to $438.5M; Jefferies initiated ULTI with a buy but hold ratings on PCTY, PAYX, and ADP

· Consumer finance and lending; SQ tgt raised to $115 from $75 at KeyBanc saying after survey, the biggest standout was the fact the sellers now expect to adopt 3.4 value+ products on average over the next 12 months, which is a 105%+ increase from current levels


· Pharma movers; AKRX tgt cut to $10 from $27 at RBC Capital saying negative case scenario was delivered to AKRX in a decision which means FRE will not be forced to close at $34 per share pending appeal; PRTK said the FDA approved SEYSARA (sarecycline) for the treatment of inflammatory lesions of non-nodular moderate-to-severe acne vulgaris in patients at least nine years old; PCRX tgt raised to $49 at Canaccord as recently reported IQVIA monthly data for August show a major acceleration of volume and revenue growth vs. a year ago

· Biotech movers; CLVS said its 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; GILD shares active after abstracts for the AASLD Liver Meeting were posted last night for NASH drug; ICPT downgraded to outperform at Raymond James saying risk-reward remains favorable heading into pivotal data from REGENERATE (1H19), but shares traded above our prior price target; AVRO shares fall over 10% on Fabry gene therapy trial data

· Medical equipment and devices; EW was downgraded at both Guggenheim and Bank America as each see little upside as current P/E multiple on 2019 earnings seems full

· Cannabis space: Roth Capital said it is initiating industry coverage of the global cannabis market with an analysis of the legal cannabis industry outside the United States. Cannabis is on the verge of an unprecedented, one-time conversion from a $150 billion illegal market to a larger legal market for medical and recreational use.

Industrials & Materials

· Industrial & Machinery; GE bounces initially 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 (prices slipped later as S&P 500 cut its ratings); GNRCdowngraded to sector weight at KeyBanc saying consensus expectations have run too high heading into next year; EMR agreed to buy Intelligent Platforms, a division of General Electric, but no terms were disclosed; heavy duty truckers (CMI, PCR, NAV) active after Class 8 truck orders for September rise 90% y/y to 42,800 units, citing ACT Research.

· Transports; in airlines, DAL 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% (comments/guidance weighed on airlines); JBLU said “Building Blocks” will improve margin and returns, and power “meaningful” EPS growth through 2020 and beyond

· 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)

· Materials/Chemicals; MOS tgt raised to $40 at RBC as believe Mosaic will continue benefiting from several positive catalysts while CF tgt raised to $50 as expect 3Q/18 in-line with expectations as the recent run-up in nitrogen prices started towards the latter part of the quarter.

Technology, Media & Telecom

· Internet; SFIX shares plunge after 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; AMZN raises minimum wage for all US employees to $15 per hour; NFLX positive mention by both Goldman Sachs and Loop Capital today ahead of Q3 results, but shares slipped with other Internet names

· Semiconductors; Monthly global chip sales cracked a record $40 billion in August, according to trade group Semiconductor Industry Association/SIA reported that August chip sales rose 14.9% worldwide to $40.16 billion from a year ago, topping July’s record sales of $39.49 billion; INTC rises as Bluefin Research said 2H production levels suggest upside to analyst revenue estimates for fourth quarter and first quarter of 2019; semi’s overall led by gains in INTC and MU early, while AMD among top decliners; equipment names also rebounding after cautious analyst comments yesterday on LRCX, AMAT

· Software movers; MDB downgraded to reduce at Nomura as believe the current market value reflects extreme valuation; DBX upgraded to neutral at Nomura feel that, near term, the stock is in a more balanced risk/reward state/longer term, continue to believe DBX will struggle to transform into an enterprise offering; DOCU shares pullback after good gains for the 2018 IPO (has declined since recent secondary at $55 on Sept 14th; ORCL shares underperformed


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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