Mid-Morning Look: October 3, 2018

Scott GreenDaily Market Report

Mid-Morning Look

Wednesday, October 3, 2018

U.S. equities rise, with the Dow Jones Industrial Average reaching a new all-time high, as large multinational companies including Boeing and Caterpillar led gains. The benchmark S&P 500 index is within a few points of its all-time record 2,940.91 on 9/21, while the Nasdaq Composite and Russell 2000 index each rebound after back-to-back days of selling pressure. U.S. equity futures are also getting a boost from Italy’s relief rally, with European markets bouncing. Economic data came in strong across the board with both private payroll (ADP) data beating estimates along with a 21-year high for the ISM Services index with a reading of 61.6 (ahead of jobs data on Friday). The data, coupled with easing fears in Europe helping boost stocks/weigh on bonds as yields spike. In sector news, semiconductors slide following another cautious warn from Morgan Stanley on group, lowering estimates and targets of many stocks; homebuilders active after LEN beat, but new orders miss weighed on shares; retailers trying to bounce after yesterday’s plunge following news AMZN raising minimum wage in the US to $15.

Macro news still important as: 1) Italian bonds and stocks recovered on a report the government bowed to pressure from the EU to trim its budget-deficit target, 2) The pound pared gains as UK Prime Minister Theresa May said she’s not afraid to walk away from a Brexit deal in her speech to the Conservative Party; 3) Turkish inflation soared to the fastest pace in more than 15 years in September following the lira’s meltdown and headline CPI came in at 24.5%, vs. 17.9% in August and consensus for 21.1%.

Treasuries, Currencies and Commodities

· In currency markets, the dollar jumps amid another round of positive economic data as private payrolls easily top consensus views (230K vs. 84K est.) and as ISM services data rises to 61.6 above est. 58.0, also a post-recession high and one of highest levels ever. The dollar moves back above the 114 level vs. the yen, while the euro bounces off intraday lows of 1.1526 to trade flat against the dollar (mixed PMI data weighs on optimism spurred by Italian government officials’ assurances on budget deficit cuts). The pound at the highs, back above 1.30 vs. the greenback.

· Precious metals holding ground after surging to 2-week highs yesterday, with prices only down slight around $1,206 an ounce, despite another push in the dollar today

· Energy futures pullback from 4-year highs amid two bearish data points/news today: 1) the EIA reported weekly crude stockpiles rose a much greater 7.98M barrels, well above the expected 1.5M barrel build, with Cushing up 1.699M barrels (though gasoline and distillate data came in bullish with larger draws); 2) earlier, Saudi energy minister al-Falih says his country’s oil production has reached an all-time high 10.7M bbl/day, in an effort to compensate for the loss of Iranian barrels from U.S. sanctions – oil has since pared losses

· Treasury market’s slide as yields spike after reports said the Italian government would slowly trim its budget deficits from 2020, easing fears of a clash between them and the EU. Positive economic data also helping boost yields, as the US economy running full steam ahead (better jobs report and ISM services data both beating expectations); the 10-year yield topped 3.09%, the 30-year yield above 3.24% and the 2-year yield at 2.83%

Economic Data

· Private payroll data for September surprises to the upside as ADP said private-sector employment as employers added 230K jobs, handily topping expectations of around 180K and marked the highest gain since February. August’s gain was upwardly revised to show 168,000 growth instead of a previously estimated 163,000.Data pre-cursor to Friday nonfarm payrolls

· ISM Non-Manufacturing index rises to 61.6 in September, topping the 58.0 estimated and above 58.5 prior month; business activity rose to 65.2 vs 60.7 prior month, while new orders rose to 61.6 vs 60.4 and employment rose to 62.4 vs 56.7 (employment index highest level on record)

· Markit September Composite PMI 53.9 vs. flash reading 53.4, while index falls to 53.9 from 54.7 in August and compared to year ago reading of 54.8; output prices rise to 56.6 vs 55.3 in August while employment rises vs prior month

Sector Movers Today

· Metals & Materials; aluminum stocks very active, with AA shares rising, but CENX falling after Norsk Hydro ASA said it will temporarily close the Alunorte alumina refinery (the largest aluminum refinery in the world) as the stoppage is expected increase the scarcity of alumina and raises the possibility of higher metal prices; Copper producers higher after RIO and BHP reiterated their bullish stance on the commodity

· Semiconductors; another cautious analyst comment as Morgan Stanley said a slowdown in autos and industrial is likely to weigh on guidance for Q4 as they cut estimates for Q4 and 2019, leading to a reduction in PTs. Investor sentiment has already swung from positive to negative, although further de-risking could keep pressure on stocks – stay Cautious on Semis (tgts were cut for APH, ADI, TEL, MCHP, MXIM, NXPI, QRVO, and SWKS). Separately, Susquehanna reduced estimates for AMAT, LRCX and KLAC with most of the revision focused on 1h19. We argue annualized WFE tracked ~$53-$54bn in 1h18, but down to $45bn in 2h18.

· Housing & Building Products; homebuilder LEN posted a top and bottom line Q3 beat sending shares higher initially, but the company reported new-home orders climbed 62% in Q3 to 12,319, missing the firm’s target of 12,500; SunTrust lowered estimates on the residential roofing segments at BECN and OC on a weak quarter end in volume and pricing. The recent hurricane did little in the way of storm damage, but did disrupt work given the Eastern Seaboard rain

· Sand frac sector cautious at Credit Suisse as they downgraded CVIA to underperform from neutral and cut tgt to $7.50 from $14 and downgraded HCLP to neutral and $11 tgt as lowers frac sand assumptions; SLCA tgt cut to $21 from $29 – for sector, sees $26/ton Northern White sand mine-gate pricing in 2019 vs prior ~$31/ton; also cites weaker demand environment in 2H18

· Refiners; Barclays comments on the sector as they upgraded PSX to Equal Weight from Underweight following sharp share price underperformance (up 13% YTD vs. peers +30%), while downgrading CVRR to Underweight from Equal Weight given the majority owner’s right to purchase the remaining units at market prices. For MPC, the firm said at 3 million b/d (mmb/d) of US refining capacity, the company’s new found scale is nearly a class of its own as they reinstate with an overweight and names it refining sector’s Top Pick, replacing PBF

· Medical equipment and devices; NVCN shares rise after the company announced positive data from the first U.S. patient to be implanted with a device to treat refractory angina; SYK positive mention at JPMorgan as maintain overweight and $200 tgt noting stock has lagged its peers YTD despite solid earnings and think the current price is an attractive entry point ahead of Q3; ELGX shares rose as preannounced a Q3 revenue range of $34.3-$34.7M that outpaced consensus’s estimate of $31.5M. Sales guidance for 2018 was revised to $150-$155M (prior: $145-$155M); EXAS active after Jana Partners listed it among its top 5 holdings in its September monthly letter


· AA +7%; after Norsk Hydro ASA said it will temporarily close the Alunorte alumina refinery/ stoppage is expected increase the scarcity of alumina and raises possibility of higher metal prices

· BA +1%; trades to another all-time record high, along with gains in CAT as industrials leading market gains on improved trade news with Canada and Mexico this week

· MPC +3%; outperformance in oil refiners today, with VLO, HFC, PSX rising

· NVCN +27%; shares rise after the company announced positive data from the first U.S. patient to be implanted with a device to treat refractory angina

· TPX +9%; several analysts positive on shares (upgraded at UBS) after Reuters reported late yesterday that Mattress Firm preparing to file for bankruptcy as soon as this week, and the process is expected to completed within a couple of months once it files https://reut.rs/2NkMsvT

· WING +3%; upgraded to buy at Guggenheim as reflects the firm’s “increased confidence” in WING’s ability to support mid-single digit comps and double-digit expansion through 2025

· WYNN +4%; among the top gainers in the S&P 500, rallying after recent underperformance following softer Macau monthly data after recent typhoon hurt the area


· AMD -4%; seeing profit taking/pullback as money rotates into INTC, which is up again after leading the Dow top gainers yesterday – general pullback in semi’s on Morgan Stanley call

· AYI -10%; reported Q4 earnings and sales above consensus views but said margins fell amid a sharp rise in input costs/operating margin decreased 3.9%

· IGC -22%; after the company that recently entered the cannabidiol-infused energy drink market said it completed a 5.65M share equity offering at a weighted average price of $5.30

· PTCT -4%; after several posters for its oral SMA drug RG7916, partnered with Roche were released; analysts defend sell-off (RBC) saying shares ran up into presentation

· RPM -3%; reported Q2 EPS of 76c, below the lowest estimates (avg 86c) citing costs and restructuring expenses for the negative impact on profitability


· GW Pharmaceuticals (GWPH) 1.9M share Secondary priced at $158.00

· Epizyme (EPZM) 8.333M share Spot Secondary priced at $9.00

· Kala Pharmaceuticals (KALA) 7.5M share Spot Secondary priced at $8.25

· Upwork Inc. (UPWK) priced its 12.48M share IPO at $15 per share, above its expected price range of $12-$14, as it will raise at least $187 million



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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