Friday, October 27, 17
Equity Market Recap
· Record highs for the Nasdaq Composite, topping the 6,700 level and rising more than 2.2% (or more than 150 points) for its biggest one day point gain in over two-years behind a strong round of earnings out of tech giants. The S&P 500 index (also record highs) and the Nasdaq Comp got a massive lift after AMZN, GOOGL, INTC and MSFT all reported upside surprises to quarterly results/guidance, sending each to lifetime highs. Earnings was truly the main driver today, but it has been a big week of news along with better economic data also driving stocks higher. Tax reform took one step closer on Thursday after the House of Representatives adopted the Senate’s budget plan which is expected to keep tax cut negotiations on a brisk path. The dollar rallied this week on central bank news, as the Bank of Canada stressed it will be cautious on raising rates, while the ECB yesterday kept rates unchanged at historic lows (as expected) while confirming plans to begin reining in its bond-buying program next year, cutting monthly purchases to €30B. Economic data was also strong this week, capped by an upside 3% GDP surprise today. On the Fed front, Bloomberg reported that President Donald Trump is leaning toward appointing Federal Reserve Governor Jerome Powell to be the next chairman of the Fed, as reports this week have indicated Cohn, Yellen are no longer under consideration and was between Powell and Taylor. There were a few blemishes despite today’s rally in stocks, as Healthcare dropped after Dow component MRK quarterly sales missed and retail dropped after a sharp profit warning from JCP (fell to lifetime lows) weighed on department stores and shopping mall REITs. Energy stocks got a boost as WTI crude settled at its best levels since February and Brent crude topped $60 for the first time on over 2-years.
· Overseas, Asian stocks gain broadly with Nikkei reaching 22,000 for first time since 1996 while Europe volatile. The CBOE Volatility Index (VIX) tumbled back towards 10. In Europe, the worsening crisis between Spain and its restive Catalonia region didn’t hurt stocks, even after Spanish Prime Minister Rajoy confirmed his intention to oust the Catalan government in retaliation for independence vote. Firing Catalan President Carles Puigdemont, Vice President Oriol Junqueras and the rest of the cabinet were the first of several measures announced by Rajoy. He called for elections on December 21st.
· GDP strong beat for Q3/tops views; the U.S. economy continued to grow at a steady clip during the third quarter, exceeding expectations despite the disruptions caused by hurricanes Harvey and Irma; Q3 GDP grew at a 3% clip, above views for 2.6% and only slightly below the 3.1% rate last quarter; personal consumption rose 2.4% in 3Q (vs. est. 2.1%) after rising 3.3% prior quarter, while GDP price index rose 2.2% in 3Q (est. 1.7%) after rising 1.0% prior quarter and core PCE in-line 1.3%
· Final Michigan Sentiment reading for October rose to 100.7, in-line with estimates, slightly below the 101.1 preliminary reading, but well above the 95.1 reading last month; the expectations index rose to 90.5 vs. 84.4 last month while current economic conditions index rose to 116.5 vs. 111.7 last month.
· Oil prices jumped 2.4%, as WTI crude rises $1.26 to settle at $43.90 per barrel (highest close since February), while Brent crude topped $60 per barrel for the first time since July 2015 as markets broadly higher on the week. Ahead of OPEC’s policy meeting on Nov. 30, Saudi Arabia and Russia declared their support for extending an OPEC-led deal to cut supplies for another nine months. Saudi Arabia’s Crown Prince Mohammed bin Salman backed the extension of OPEC-led output cuts Thursday. Brent oil ends the week 4.7% higher while WTI crude posted a weekly advance of about 4.4%.
· Gold prices post modest gains, up $2.20, or 0.2% to settle at $1,271.80 an ounce (off yesterday close of $1,269.80 – lowest since early August), but end the week -0.7% lower following a late week rally for the dollar (6th weekly loss in last seven for the precious metal). Silver settled at $16.752 an ounce, down 0.4% for the session and logging a weekly loss of 1.9%. December copper fell 2.3% to $3.104 a pound, down about 2% on the week.
Currencies & Bonds
· The dollar bounced on the week, posting solid gains vs. rival currencies, but biggest move comes against the euro on dovish ECB comments. The euro dropped below the 1.16 level against the dollar for the first time since July (lows 1.1575) after better U.S. GDP data, as well as encouraging signs for U.S. tax reform and a dovish take on Thursday’s action by the European Central Bank. The dollar index touched 3-month highs of 95.15 before paring gains. The dollar pared those gains after headlines that President Trump said to favor Powell as the next Fed Chairperson (over Taylor). The dovish QE taper by the ECB, the House narrowly approved a recently passed Senate budget that allows for tax cuts, and news reports that Yellen, Warsh, Cohn are out of Fed hunt; Powell and Taylor the only two frontrunners lifted the greenback. Bonds gained as yields dipped after reports indicated that President Trump was leaning toward the Fed’s Powell as the next Fed Chairperson; the yield on the 10-yr dipped to 2.41% after the report, but settled around 2.425% down from above 2.45% late yesterday.
Sector News Breakdown
· Retailers; AMZN topped $1,100 level (shares up as much as 13%) as reported revenue above expectations in each of its three segments/with net sales growth accelerating by 29% ex $1.3B of Whole Foods revenue (vs. +26% in 2Q), boosted by strong Prime Day results/sign-ups that carried through the quarter/Q4 guidance assumes 28-38% growth and operating income view better-than-feared/AWS posted its fastest dollar growth ever; outside of AMZN, JCPa big decline, falling over 20% as reduced its year views and forecast a wider-than-expected third-quarter per-share loss (weighed on M, KSS, JWN prices)
· Other retailer news; DECK reported a robust 2Q beat, raised FY guidance and announced a new stock buy-back program and that it is no longer actively pursuing a sale; COLM reported a solid beat in sales and EPS, but full-year forecast misses forecasts; toy makers under renewed pressure after MAT 3Q fell significantly below expectations as revenue was negatively impacted by Toys R Us, shrinking North American inventory levels and said it would suspend its dividend (HAS lower); the National Retail Federation says consumers will spend an average of $967.13 this year, according to the annual survey, up 3.4% from the $935.58 last year
· Consumer Staples; CL posts profit miss though organic sales saw a slight beat at +1.5% vs. street +1.4% (still better than recent topline misses from PG, UNand Reckitt); beer names weak again after SAM reported 3Q sales shortfall (after recent Heineken miss), sending TAP lower
· Casino, Lodging & Leisure; in gaming, WYNN Q3 Ebitda beat but Macau slightly below some views; PENN was downgraded at Telsey citing the strong run in the shares; in lodging, HLT was downgraded to neutral at FBR Capital saying the stock doesn’t look cheap anymore after doubling over the last 2-years; IMAXwas upgraded to overweight at JP Morgan on improved conviction that fundamentals will improve following earnings; cruise lines (RCL, CCL) outperformed early morning
· Autos; TSLA was downgraded to in line from outperform (PT $312 from $330) citing a more cautious view on Model 3 production; says at this point, has little insight into how production is running; cuts Model 3 delivery forecasts; in tires, GT cut its 2017 operating income view to ~$1.5B from the prior outlook of $1.6B-$1.65B; auto pulling back after great week of earnings – profit taking – GM, FCAU, F, BWA all posted beats this week
· Energy giants and Dow components CVX and XOM fell after reporting disappointing production for Q3 though both companies’ profits surpassed analyst expectations; XOM said it churned out the equivalent of 3.97M barrels a day, short of the 4M estimate while CVX pumped the equivalent of 2.717M barrels a day, underperforming the 2.777M estimate; CVX also helped by the strength of its downstream refining and marketing operations; RICE jumped late day as ISS recommended EQT holders vote in favor of the merger deal; Baker Hughes (BHGE) weekly rig count showed total U.S. rig count fell -4 to 909, oil rigs rose 1 to 737 and gas rigs fell -5 to 172
· Alternative energy/Solar stocks; FSLR Q3 earnings beat and raised guidance for the year (SPWR, RUN, SEDG, CSIQ active) and upgraded at Needham citing strong bookings validating solid demand for FSLR’s products as well as better pricing and margins expansion as S6 ramps and continued progress in S6 transition with extended S4 production likely to happen; CCJ posted surprise quarterly loss and also lowered its uranium production guidance to 24m lbs from 25.2m lbs due to delays at Key Lake and lower production than expected at Smith Ranch-Highland; in coal, CLD shares moved lower
· Utilities; several utility stocks at 52-week highs today include: NEE, WEC PEG, ED, AWK as the UTY index back to 700 level earlier before paring gains (traded just shy of record highs of 703.16 back on 9/11); FE Q3 results beat and lifted forecasts
· Other movers on news; COG reported a 3-year Marcellus plan to deliver a CAGR of 20%+ and discretionary cash flow CAGR of 25%+ from 2017-2020 assuming current strip prices; PSX beat attributable to better-than-expected Chemicals results; NOV Q3 sales below consensus
· MLPs rebound; big bounce off 52-week lows for the Alerian MLP index (AMZ) – yesterday touched low of 259.53 before reversing and moving higher….adds to gains again today as AMZ rises over 2% to above 270 level (3.55% bounce over last 2-days) – helped today with broader energy bounce; shares of NGL, NS, HEP, MPLX among top gainers
· Financials were little changed in a good week of trading n tax reform pushing forward, rising rate hike expectations and higher likelihood the next FOMC Chair will lean to the rate hike side (down to Powell and Taylor); in insurance stocks; RGA Q3 operating EPS topped highest estimates; PFG Q3 operating EPS missed by 2c; CB posted smaller than expected Q3 EPS loss
· REITs; mall REITs lower on SPG results as year mid-point missed views – also concerns re department stores after the big lower guide from JCP (shares of GGP, MAC, TCO, SKT also lower); CPT Q3 FFO missed by 2c and lower FY FFO guidance; lot of REIT earnings on Monday with ARE, VNO, UDR, AVB, MAC, reporting
· Finance and Lending; PLPM announced it will be acquired by Fintrax Group for $4.50 a share in cash https://goo.gl/bE7eq3; ELLI revenue came in over the high end of guidance but meaningfully better margins drove substantial Adj. EBITDA and EPS beats
· Managed care sector remains active following the late day story by the WSJ saying CVS has offered more than $200 per share for AET in buyout bid, the WSJ reported late day, lifting managed care stocks late day (ANTM, CI, HUM, CNC, UNH all moved) https://goo.gl/UwafgP
· Large Cap Pharma; MRK Q3 sales fell YoY, below estimates and as Keytruda sales of $1.05B also fell short of street expectations (though EPS beat and raised guidance); ABBV posted Q3 earnings that beat expectations and announced bullish financial targets; TGTX updated results from the Phase 2 study of TG-1101 (ublituximab) in patients with multiple sclerosis
· Biotech movers; biotech weak early after another round of mixed earnings results, with GILD falling after Hepatitis C franchise is eroding faster than expected, with management guiding for a bigger decline in the next quarter; CELG extends yesterday 19% loss on miss and lower outlook as analysts downgrade/cut tgts; SGEN and BMRN shares rose early
· Hospital movers; THC announced a targeted cost reduction initiative which is intended to lower annual operating expenses by $150M/sees eliminating about 1,300 positions; LPNT drags peers lower after another earnings disappointment among publicly-traded hospitals adds to yesterday’s drop (UHS miss and lower guide hit hospitals yesterday)
· Medical devices and equipment; ALGN 52-week high after reported higher profit and sales than estimates as Leerink raised tgt to Street high $250 from $199, saying the company satisfied elevated expectations for the quarter with a significant revenue and EPS beat; SYK trades to 52-week highs after earnings/guidance; medical devices/equipment names also at 52-week highs today include: WAT, SYK, PKI, ALGN, DHR, MTD, RMD
· Healthcare Services and technology; CERN reported weaker-than-expected 3Q bookings and gave preliminary guidance for a weaker-than-expected outlook for profitability in 2018 citing several large IT outsourcing and hosting agreements that took longer than expected to close; PDCO and HSIC weak early after Piper said believe Amazon will enter the PBM industry and perhaps a small portion of the healthcare distribution industry focusing on commoditized consumables that make up 10% of HSIC and PDCO’s consumable book (ABC, ESRX, RAD, WBA, CAH also remain active after the AMZN news last night weighed on the sector about PBM entrance)
Industrials & Materials
· Chemical stocks; group got a lift midday after Reuters reported Akzo Nobel has approached AXTA for potential merger, saying it was is in the early stages of considering a deal and there is no certainty that the two companies will agree to a merger https://goo.gl/qz1Uxm (shares of RPM, FUL, FOE, PPG were among movers after story)
· Metals & Mining; sector broadly lower initially, led by declines in steels, but some names bounced off lows (NUE); CLF and FCX shares underperform, while aluminum stocks weak on CENX earnings (AA also lower)
Technology, Media & Telecom
· Internet; GOOGL and AMZN led the group higher after quarterly beats, while BIDU revenue guidance fell short of consensus; GOOGL strength as top and bottom line results beat, with TAC stable at 23%, paid clicks up 47% and cost-per-click -18%; BIDU fell after its Q4 revenue outlook fell short of consensus (saw Q4 sales 22.23B-23.41B yuan, below 24.8B yuan view); TWTR extends yesterday gains on earnings, trades to 52-week high today
· Online travel names fall on EXPE results (follows recent weakness after TRVG), as company Q3 EPS, revenue, and Ebitda trailed estimates, and said room night growth in 3Q was 16%, slowing from 31% growth YoY (shares of PCLN slid early)
· Semiconductors; Dow component INTC reported 3Q revenue and EPS ahead of consensus, even after adjusting for certain one-time items, and guided Q4 well above expectations as well (shares upgraded to buy at Bank America); Philly semi index (SOX) new 17-year highs again today, trading as high as 1264, led by INTC and MPWR after earnings; semi-equipment names slid with INTC cap-ex; KLAC better results; POWI shares surge more than 10% after its earnings
· Software; MSFT shares rally on top/bottom line beat and positive margin comments going forward; Internet security active as FTNT Q3 EPS/revs beat but Q4 revenue missed estimates; MULE 3Q results showed a sharp acceleration in billings growth and new subscription annual contract value (Q3 beat/Q4 guidance above views)
· Hardware and equipment movers; AAPL iPhone X pre-orders started at 3:01 EST this morning and expected ship times started at 4-5 weeks. Roughly 1 hour later, ship times moved to 5-6 weeks – the company said in an e-mailed statement that customer demand for the iPhone X is “off the charts”; GIMO to be acquired by Elliot for $38.50 per share in cash in a deal valued at $1.6B https://goo.gl/RDJ59P ; EFII shares plunged on earnings and outlook
· Telecom and media; broadcasters lower after WSJ article that the FCC is planning to make sweeping changes to media-ownership rules next month, eliminating or scaling back longstanding limits on local ownership of TV stations and newspapers, its chairman said Wednesday (NXST, SBGI among those moving) https://goo.gl/SXgFp2
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.