Equities Resume Uptrend, Bernanke Talks Futures Down

Includes: AXP, GS, JPM
by: Gary Townsend
This morning. Equity futures are lower this morning, with attribution - though there was little incremental - to Fed Chairman Bernanke’s 60 Minutes interview last evening. After fair value adjustment, December SPX futures are down -6.24 points at 1217.70, near the worst levels of the morning. Next resistance is at 1227.91; next support is at 1219.16.
After three consecutive daily gains, equity markets have resumed the uptrend that began on Aug. 31. Friday’s advance came on lower volume, but NASDAQ set a new 2010 closing high. And while stocks advanced for the third consecutive day, volumes fell for the third consecutive day, too. So, despite the NASDAQ’s close at a new high, markets did not confirm the start of a new uptrend. What’s more apparent, the “correction” that began after the early November highs is better construed as a market pullback or consolidation of the uptrend that commenced with the follow-through rally on Aug. 31, when equity markets staged an impressive positive reversal on higher volume. The NYSE composite peaked Nov. 5, when it closed at 7880.66. The Nov. 30 trough was -5.71% lower at 7430.94. The NYA closed Friday at 7751.58, up +4.31% in December and -0.63% below its yearly high. But with the NASDAQ setting a new yearly high, the conclusion, then is that equities have resumed the uptrend that began last August.
In fact, most of the same trends that were in place on Nov. 5 remain in place today, namely, eurozone sovereign debt concerns, the improved tenor of economic reports, the final disposition of the Bush tax cuts, and the direction of monetary policy in Europe, the U.S., and emerging economies. Eurozone debt issues took center stage in May, but were assuaged by a financial bailout of Greece and European bank stress tests. Germany gave the issue new life in September, when it advocated that bondholders should share in future sovereign debt defaults. After widening out in November, sovereign CDS spreads have narrowed this month, but much must still be resolved.
Economic reports, especially encouraging German, Chinese, and U.S. PMI and U.S. pending home sales, supported views of improving world economic growth. Notably, on Thursday, Goldman Sachs raised its outlook for U.S. growth to +2.7% from +2.0%, and recommended financial stocks for the first time since 2008. Congress continues to debate the fate of the Bush tax cuts, but seems inexorably poised to extend them for at least two more years. Finally, U.S. monetary policy is accommodative to a fault, as QE2 finances the majority of this year’s federal deficit, while the ECB seems headed in that direction, though China and Brazil are tightening.
One new trend that bodes well for equity prices is that through the last three weeks of November, investors bought stocks and sold bonds – the first time since March 2009 that bonds saw three consecutive weekly outflows. Moreover, November’s equity fund inflows – about $20 billion – were the best since the bull market peaked in early October 2007. And after having spent much of the past two years attacking our financial system and our major banks, it would seem that higher stock prices are now governmental policy. Last week, former Fed Chairman Greenspan opined on CNBC last week that higher stock prices were essential to economic recovery – essentially repeating current Fed Chairman Bernanke’s Nov. 4 opinion piece in The Washington Post that “higher stock prices will boost consumer wealth … and confidence.”
This morning, in Europe, sovereign CDS spreads are mixed, with Greek and Spanish slightly wider, but with Portugal narrower. Portuguese CDS spreads now more than 110 bps below their Nov. 26 peak. The dollar is stronger. Commodities are mixed. Asian equity markets closed lower, with the Nikkei -0.11% and Hang Seng -0.36%. European equity markets are mixed, with the Eurostoxx50 +-0.43%, FTSE +0.32%, and DAX +0.14%. On the EuroStoxx, financials are down -1.55%, the worst performing market sector.
Overnight USD LIBOR is 0.24031%, down from 0.24063% Friday and above the November 0.22563% lows. For the fourth consecutive day, USD 3-month LIBOR held steady at +0.30344%, but above the +0.28438% lows of mid-November. The dollar is stronger against the pound, euro and yen. The euro trades at US$1.3296, compared to US$1.3414 the prior day and USD$1.3209 the day before. The dollar trades at ¥82.88, compared to ¥82.53 Friday and ¥83.82 the prior day. U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.452% and 2.955%, respectively, compared to 0.468% and 3.005% Friday. The yield curve spread widened to +2.503% from +2.537% 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 mixed, with lower petroleum but higher natural gas, higher precious metals, lower aluminum, higher copper, and mixed agricultural prices.
U.S. news. Congress is moving toward a tax deal compromise that will extend the Bush-era tax cuts in exchange for extending unemployment benefits. Estate tax issues remain unresolved. Today’s economic reporting is light. This morning’s focus is analysis of Bernanke’s 60 Minutes appearance last night, but there was little that was incremental. Given his and the Fed’s suspect credibility, his most notable comment was his “100%” confidence that the Fed can prevent runaway inflation. Somewhat more surprisingly, Bernanke suggested that other Fed actions are sterilizing QE2, that there is no expansion of the money supply. The reporting focus turns tomorrow to consumer credit and confidence, on Wednesday to initial jobless claims, Thursday to the October trade balance, and Friday to the November budget statement.
Overseas news. This morning, Moody’s downgraded Hungary to once notch above junk. The IMF sent a report to Eurozone finance ministers calling for an increase in the bailout fund’s size. This week, South Korea will conduct military test firing exercises at 29 locations, including at one island in the Yellow Sea. An advisor to the People’s Bank of China warned of additional bank reserve rate hikes in the beginning of 2011.
Company news/research:
  • JP Morgan Chase (NYSE:JPM) – May announce a 10% buyback program in the first quarter, according to Deutsche Bank analyst
  • American Express (NYSE:AXP) and Goldman Sachs (NYSE:GS) – Mncluded on top 40 stocks for 2011 at BofA/ML
3Q 2010 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 14.4x estimated 2010 earnings ($85.25) and 12.7x estimated 2011 earnings (increased to $96.60 from $96.51), compared to 14.3x and 12.6x respective 2010-11 earnings Friday. 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 1.41x tangible book value and 13.6x 2011 earnings, compared to 1.40x tangible book value and 13.3x 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 +34.3% and expect 4Q2010 earnings to exceed 3Q2010 earnings by +24.6%. 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.

BKX. On lower volume, the KBW bank index closed at 48.03, up +0.40 points, or +0.84%. This was the index’s
Disclosure: I am Long AXP, GS, JPM.