This morning: After fair value adjustment, equity futures are lower this morning, after a disappointing November employment report. Notwithstanding the past two day’s advances, markets remain in correction. Though yesterday’s trade extended the prior day’s exceptional gains and added at least +0.95% to all the major indexes, volume was mixed – slightly higher on the SPX and DJI, unchanged on the NYSE composite, lower on the NASDAQ – and failed to provide a clear confirmation of a new market uptrend or an end to the correction that began on November 16th.
In Europe, narrowing sovereign CDS spreads suggest a continued easing of associated debt concerns. The dollar is lower. Commodities are higher. After fair value adjustment, December SPX futures are down -7.68 points at 1215.00, near the worst levels of the morning. Next resistance is at 1226.68; next support is at 1211.60. Asian equity markets closed mixed, with the Nikkei +0.10% and Hang Seng -0.55%. European equity markets are mixed, with the Eurostoxx50 +0.50%, FTSE -0.09%, and DAX -0.34%. On the EuroStoxx, financials are down -0.11%, the 4th best performing market sector.
Overnight USD LIBOR is 0.24063%, up from 0.23969% yesterday and above the November 0.22563% lows. For the 3rd consecutive day, USD 3-month LIBOR held steady at +0.30344%, but above the +0.28438% on November 22. After release of the employment report, the dollar is weaker against the pound, euro, and yen. The euro trades at US$1.3326, compared to US$1.3209 the prior day. The dollar trades at ¥82.67, compared to ¥83.82 yesterday. U.S. Treasury yields moved lower after the report, with 2- and 10-year maturities yielding 0.468% and2.924%, respectively, compared to 0.539% and 2.988% yesterday. The yield curve spread widened to +2.456% from +2.449% yesterday. In the past year, the 2- and 10-year spread has varied from a low of +1.959% on August 26, 2010, and a high of +2.90% on January 11, 2010. Commodities are higher, with higher petroleum and natural gas, precious metals, aluminum, copper, and agricultural prices.
U.S. news. Today’s focus is the November employment report at 8:30. Yesterday’s initial jobless claims report was ambiguous, coming in higher than expected at 436K compared to 424K survey, but with a continued decline in the 4-week moving average. The report disappointed with just +39K change in nonfarm payrolls, compared to +150K survey and +151K prior. Private payrolls rose +50K, much less than expected. The unemployment rate rose to +9.8% due to growth in the labor force. Average hourly earnings and weekly hours were unchanged.
Overseas news. The November Canadian unemployment rate unexpectedly dropped, to 7.6% from 7.9%, while the economy added fewer jobs than forecast. October Euro-zone retail sales increased more than expected. In November, Spain’s consumer confidence rose from the prior month. The German Bundesbank raised its forecast for 2010 and 2011 German GDP, to +3.6% and +2.0%, respectively, from +1.9% and +1.4%. The yield spread between 10-year Portuguese bonds and German bunds narrowed to less than 300 basis points for the first time since August 24th. After yesterday’s close, Standard & Poor’s placed Greece’s BB+ long term credit rating on watch for a potential downgrade. This morning, Brazil’s central bank raised reserve requirements on bank deposits. Today, the People’s Bank of China officially announced a change in monetary policy, from a “moderately loose stance,” to a “prudent stance.” South Korea said today it will “bomb” the North if another attack occurs. In November, the Japanese services purchaser managers’ index rose to 49.5 from 47.2, the highest level since April 2010.
· XL Group (XL) – initiated at neutral at Goldman Sachs, price target of $21
· Marshall & Isley (MI) – initiated at neutral at CRT Capital
· Zions Bancorp (ZION) – initiated at neutral at CRT Capital
· Texas Capital Bancshares (TCBI) – cut to hold at Wunderlich
· Goldman Sachs (GS) – is reportedly shopping its Litton Loan mortgage servicing division for sale.
Thursday’s equity markets. Markets extended December’s gains, moving all the major indexes at least +0.95% higher, but failed to close above early November highs. Also, volume failed to impress, turning in a mixed performance. The NYSE composite recorded the best advance, up +1.43%, but volume was -0.28% lower. The SPX and DJI rose +1.28% and +0.95%, respectively, on a +1.56% and +4.73% increases in volume. The NASDAQ rose +1.17%, but volume declined -7.06%.
In short, despite the past two day’s impressive gains, markets are even more ambiguous than usual. Whether the correction is done requires further market confirmation.
Though the initial claims numbers were unimpressive, and futures pointed to a weak open, markets apparently found enough encouragement from a diminution in European sovereign debt concerns and continued improvement in the economic outlook to move impressively higher out of the gate. The SPX moved quickly above 1210 and to 1215 by 11:00, and trended higher throughout the day to end just short of the 1221.89 intraday high and its best close since November 8th. Market breadth was positive. All market segments were at least +0.36% higher on the day. Financials, basic materials, and industrials were the best performers. Health care, consumer goods, and utilities were the laggards.
Market sentiment is improving, despite the correction that commenced November 16th. Major indexes are at least +7.34% higher in 2010, but at 1221.53, the SPX closed -0.35% below its November 5th close, its high point this year. While the broader indices have recovered most of their correction losses, financial stocks have not, with the BKX closing -17.8% below its April highs, below -20% yesterday for the 1st time in some weeks, and finally emerging from bear market territory.
The latest week’s (December 3rd) AAII Investor Bullish Sentiment index rose +4.77% to 49.66 from 47.40 on November 25th. This is a bullish reading, but below the November 4th level, when markets were still in a confirmed uptrend. Sentiment indicators are highly variable, but this reading is probably best read as bearish.
Technical indicators are mixed, but improving. Except for the NYSE composite, the major indexes closed above their 200-week moving averages. The NYSE composite remains below its 200-week moving average, but only by a fraction of a point (7712.25 vs. 7711.51). All major indexes closed above their respective 20-, 50-, 100-, and 200-day averages. Markets are in a generally bullish configuration, with 50-day moving averages above respective 200-day moving averages. Directional movement indicators switched to positive yesterday, with a weak trend. After yesterday’s gains, short-term relative strength indicators moved into the upper end of a neutral range. Market volatility decreased. Yesterday, the VIX closed down -9.22% to 19.39 from 21.36 Wednesday’s close, below 20.0 again for the 1st time in 5 trading days.
Financials outperformed the SPX, with large caps outperforming smaller banks. The XLF, BKX, and KRX closed up +2.56%, +3.88%, and +2.16%, respectively.
NYSE Indicators. Volume decreased slightly to 1.115 billion shares, down -0.28% from 1.119 billion shares Wednesday, but above the1.044 billion share 50-day moving average. For the 2nd consecutive day, market breadth was positive, and up volume led down volume by a wide margin. Advancing stocks led decliners by +1270 (compared to +1686 Wednesday), or 2.45:1. Up volume led down volume by 5.81:1.
3Q2010 Earnings. Earnings results have generally exceeded EPS and revenue expectations. Of the 469 S&P500 companies that reported earnings to date, 76% (356 of 466) beat operating EPS estimates, versus the historical average of 62%. Companies beat by an average of +6.5% (versus a historical average of +2%). EPS is up +31.4% over the prior year. Though challenged in the current operating environment, 373 companies (80%) reported increased revenues and 290 companies (61%) beat revenue estimates. With all 24 BKX members reporting, 79% (19 out of 24) beat operating EPS estimates, with a +25.3% average operating EPS surprise. Bank revenues disappointed slightly, missing expectations by -0.30% on average.
Valuation. The SPX trades at 14.3x estimated 2010 earnings ($85.25) and 12.6x estimated 2011 earnings (increased to $96.60 from $96.51), compared to 14.1x and 12.5x respective 2010-11 earnings yesterday. The 10-year average median Price/Earnings multiple is 20.0x. Since the beginning of the year, analysts increased 2010, 2011, and 2012 earnings estimates by +11.8%, +4.4%, and +5.4%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +13.3% and +28.7%, respectively.
Large-cap banks trade at a median 1.40x tangible book value and 13.3x 2011 earnings, compared to 1.36x tangible book value and 12.9x 2011 earnings yesterday. These compare to the 10-year average median multiples of 3.08x tangible book value and 15.9x earnings. Analysts expect 2011 large-cap bank earnings to exceed 2010 earnings by +34.2%. In 3Q2009, large-cap banks earned a combined $5.91 per share while the BKX Index earned -$1.24 per share. In 3Q2010, large-cap banks earned $13.78 and the BKX earned $0.71 per share.
SPX. On higher volume, the SPX rose +15.46 points, or +1.28% to close at 1221.53. Volume rose +1.56% to 893.19 million shares, from 879.50 million shares Wednesday, and above the 838.90 million share 50-day moving average. For the 30th consecutive day, its 50-day moving average closed above its 200-day moving average (1181.14 versus 1134.84, respectively). The SPX closed above its 200-week moving average (1188.69).
Again, the index achieved the majority of its daily advance in the morning, crossing the 1218 threshold at 11:15 am and staying above that level through the rest of the day. The market shrugged off higher-than-expected (but lower-than-average) initial jobless claims before the open. A strong pending home sales figure at 10am fueled the morning rally. The index trended upward after 1 pm, reaching an intra-day high of 1221.89 at 2:20 pm and closed just short of that level. The SPX closed +3.42% above its 50-day moving average (1181.14), closing above that average for the 63rd consecutive day, and +7.64% above its 200-day moving average (1134.84). The SPX retook its April-high closing level of 1217.28 and is -0.35% below its yearly high of 1225.85, set on November 5th. The 20-, 50-, 100-, and 200-day moving averages all rose.
Technical indicators are mixed, but trending positive, as the SPX closed above its April highs for the first time since November 8th. The directional momentum indicator is positive, with stable trend strength. Relative strength rose to 61.68 from 56.71, moving into the lower end of an overbought range. Next resistance is at 1226.68; next support is at 1211.60.
BKX. On higher volume, the KBW bank index closed at 47.63, up +1.78 points, or +3.88%. This was the index’s largest gain since September 1st. The index closed +10.82% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -17.8% below its April 23rd closing high.
Financial stocks outperformed, and the large cap financials outperformed the regionals for the fourth time in the last five sessions. The BKX led gains in the broader markets while trading patterns mirrored to the SPX. The BKX shot up through the morning and stalled at 11:30am at the 47.58 level. Fatigue set in until 1:30pm, when buyers returned and pushed the index up to retake its morning highs and close at 47.63, just off the 47.64 intra-day high set five minutes prior. Volume was 180.13 million shares, up 4.6% from 172.25 million shares Wednesday, and compares to 152.01 million share 50-day average.
Technical indicators are mixed. The BKX closed above its 20-, 50-, and 100-day moving averages (46.50, 46.39, and 46.62, respectively) for the first time since November 15th, but again closed below its 200-day moving average (48.87) as it has since August 10th. The 20-, 50-, and 200-day average increased, while the 100-day average trended lower. The 50-day moving average closed (by -2.48 points) below the 200-day moving average, as it has since August 16th. The directional movement indicator switched to positive, with a stable trend. Relative strength rose to 58.69 from 48.98, in the upper end of a neutral range. Next resistance is 48.23; next support at 46.44.
Disclosure: Long, XL, MI, GS