Equity Futures Point Lower on Heightened Eurozone Concerns

by: Gary Townsend
This morning. Equity futures are lower, as eurozone sovereign debt concerns and Friday’s poorer than expected jobs report weigh on equities. On Friday, U.S. equity markets closed narrowly lower on decreased volume. Markets are in a confirmed uptrend. Distribution days (which track index losses of more than 0.25% on increased volume) number four for the Nasdaq, three on NYSE composite, one for the SPX, and none for the DJI in the past 25 trading days. March SPX futures are at 1262.70, down 4.70 points after fair value adjustment. Next SPX resistance is at 1278.32. Next support is at 1263.19.
Asian equity markets closed mixed, with Chinese equities lower though on much lighter volume. The Nikkei, Hang Seng, and Shanghai closed +0.11%, -0.67%, and -1.66%, respectively. Volume was 18.4% lower on the SHCOMP, where financials were a middling performer, down 1.63%. The SHCOMP is in a confirmed uptrend after a sharp 13.5% decline starting November 9 and ending December 28. European equity markets are lower on renewed sovereign debt concerns focused on Portugal. The Eurostoxx50, FTSE, and DAX are down 1.28%, 0.47% and 0.94%, respectively. On the EuroStoxx, financials are down 1.97%, the worst performing market segment.
LIBOR trends remain unremarkable. Overnight USD LIBOR is 0.24125%, unchanged from Friday, and down from at year-end. USD 3-month LIBOR is 0.30313%, unchanged from yesterday, and compared to 0.30281% at year-end. In early trading, the dollar is slightly stronger against the euro and pound, but weaker against the yen. The euro trades at US$1.2903, compared to US$1.2907 Friday and US$1.3003 the prior day. Technically, the euro has broken down, below its 200-day moving average US$1.3075, but this has happened before, as recently as late November. The dollar trades at ¥83.14, compared to ¥83.15 Friday and ¥83.33 the prior day. The yen is much better than its ¥86.53 200-day moving average. Treasury yields are lower, with 2- and 10-year maturities yielding 0.585% and 3.310%, respectively, compared to 0.593% and 3.324% Thursday. The yield curve spread narrowed to +2.725% compared to +2.731% the prior day. 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 higher petroleum, lower natural gas, lower precious metals, higher aluminum and copper, and higher agricultural prices.
U.S. news. The trans-Alaska oil pipeline is closed after springing a leak over the weekend. Today’s economic reporting calendar is light. Tomorrow at 8:30, the NFIB releases its December small business optimism report. At 10:00, we’ll see the IBD/TIPP economic optimism report for January, and wholesale inventories for November.
Overseas news. Portugal denied receiving pressure from France and Germany to seek IMF/EU assistance. German Chancellor Merkel’s chief spokesperson declined to repeat German objections to expanding the EU bailout fund. A People’s Bank of China official advised cutting holdings of U.S. Treasuries. In December, U.K. home prices declined for the second straight month, declining 1.3% over November.
Company news/research:
  • Barclays (NYSE:BCS) -- upgraded to buy at UBS.
  • KeyCorp (NYSE:KEY) – upgraded to neutral at Susquehanna (NASDAQ:SUSQ), price target raised to $8 from $6.
  • CME Group (CME) – upgraded to buy at Bernstein, price target raised to $420 from $315.
  • Synovus Financial (SNV) – named top high-beta pick at Bernstein, price target of $4.
  • Comerica (CMA) – downgraded to neutral at Susquehanna.
Friday’s equity markets. Markets showed resilience, rebounding from significant morning losses to close slightly lower on decreased volume. At 8:30, the December employment report disappointed, falling short after Wednesday’s ADP surprise. The Labor Department revised November’s job gains +82.1% to 71k from 39K, so the disparaties between the two reports may yet be resolved, but not until after month’s end and the release of the January employment report on February 4. Despite the disappointment, futures rebounded, and markets were slightly better in early trading, but lacked much enthusiasm. At 10:15, Bloomberg reported that the Massachusetts supreme court had ruled against mortgage services in a closely-watched foreclosure case. Financials sold off hard, and markets pulled back in a measured but persistent fashion through the rest of the morning trade and into early afternoon. Equities rallied through the day’s remainder, and the major indexes closed with losses of less than -0.25% on slightly lower volumes.
The NYSE composite closed down 0.26%, followed by the Nasdaq, DJI, and SPX, which closed -0.25%, -0.19% and -0.18% lower, respectively. Despite losses on Thursday and Friday, the major indexes ended up in the first week of 2011, led by the Nasdaq, up 1.90%. When markets close higher in the first week of the year, markets have closed higher 84% of the time, according to the investors almanac.
On Friday, the strongest market segments were oil and gas, utilities, and industrials, all closing up at least 0.16%. The consumer goods, telecommunications, and financials trading desks reported a continuation of recent themes, focused on an improving U.S. economic outlook, bids on weakness, stronger risk appetites as indicated by an increased merger and acquisition activity, but mitigated by steps by Chinese monetary authorities to pare growth there, and European sovereign concerns that are unlikely to find quick resolution.
Technical indicators are generally positive. Markets are in a confirmed uptrend that began in early September, and after a consolidation in November, extended robustly through one of the strongest Decembers on record. All major indexes closed above their respective 200-week and 20-, 50-, 100-, and 200-day averages. Markets are in a bullish configuration, with 50-day moving averages above respective 200-day moving averages. New 52-week highs versus lows fell to +125 from +187 the prior day. The new HILO trend is positive, with a 10-day moving average 165.40, above the respective 20- and 50-day moving averages (159.75 and 157.82). Directional movement indicators are positive, and the trend is strengthening. Relative strength indicators have retreated to a neutral range. Prospective resistance levels are 1278 on the SPX, followed by 1290, and 1300; technical support is at 1260, followed by 1250, and 1230.
Market volatility fell, as the VIX ended down 14.2% to 17.14 from 17.40 the prior day. Market sentiment is positive, probably excessively so, though off recent highs. The latest week’s (January 6) AAII Investor Bullish Sentiment index rose to 55.88, up 8.27% from 51.61 on December 30, but below the 63.30 reading of December 23. Sentiment indicators are highly variable and are often best read as contrarian in their aspect. Despite positive sentiment, there are many market skeptics, too, and they have hardly capitulated, based on endless business network interviews and research that passes this desk.
Financial stocks closed lower, and were the worst performing market segments, with the XLF, BKX, and KRX ending -0.90%, -0.94%, and -2.90%, respectively, in heavy trading. Smaller regional and community banks were the worst performers in the space. While the broader indices are near two-year highs and have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -8.75% below its April highs and -35.9% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume fell a slight 0.35% to 1.090 billion shares from 1.093 billion shares Thursday, and compares to a 9920 million share 50-day moving average. Market breadth was negative, and up volume lagged down volume. Advancing stocks lagged decliners by -368 (compared to -657 Thursday), or 0.78:1. Up volume lagged down volume by 0.68:1.
Valuation. The SPX trades at 13.4x estimated 2011 earnings ($94.79) and 11.9x estimated 2012 earnings ($107.24), compared to 13.4x and 11.9x respective 2011-12 earnings Friday. The 10-year average median Price/Earnings multiple is 20.0x. Since the beginning of 2010, analysts increased 2011 and 2012 earnings estimates by +2.5, and +3.0%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +18.3% and +33.8%, respectively.
Large-cap banks trade at a median 1.56x tangible book value and 14.5x 2011 earnings, compared to 1.58x tangible book value and 14.6x 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 +34.4%. Analysts’ estimates for bank 4Q 2010 earnings are 20.6% higher than were estimates for 3Q2010 earnings. In 3Q2010, large-cap banks earned $13.78 (the sum of 31 banks’ operating EPS), compared to $5.32 in 3Q2009. In 3Q 2010, the BKX earned $0.71 per share, compared to -$1.24 per share a year earlier.
Quarterly Bank Balance Sheet Analysis. According to the Federal Reserve’s latest weekly H.8 report (data through 12/29/10), the 25 largest domestic banks collectively reported a 1.0% increase in period-end loans over the third quarter, a 6.3% drop in reserves (to 3.81% of total loans, or a $10.2 billion drop from the prior quarter), and a +3.4% increase in deposits.
Regarding loans, C&I loans increased approximately 2.2% over the third quarter levels, residential real estate climbed 2.0%, and credit card loans increased 1.2%, while home equity loans declined 3.9% and commercial real estate loans declined 3.2%.
SPX. On lower volume, the SPX fell 2.35 points, or 0.18%. While losses remain marginal, the index posted its second straight decline, its third decline in the week, and its fifth decline in the previous seven sessions. Volume fell 1.82% to 848.82 million shares from 864.56 million shares Thursday, above the 780.70 million share 50-day moving average. For the 56th consecutive day, its 50-day moving average closed above its 200-day moving average (1224.43 versus 1148.89, respectively). The SPX closed above its 200-week moving average (1184.39).
The SPX opened modestly higher to the 1276.83 level at 9:36, the intra-day high. The index traded sideways through 10:30 as investors reluctantly accepted the December labor market report’s miss. At 10:30, a Massachusetts state supreme court invalidated two foreclosures based on standard securitization document-transfer practices, sending financials and the broader markets lower. The SPX declined through the morning until it found support at 1261.70, the intra-day low, just before 1:00. Buyers again bought the dip, and the index managed a steady afternoon rally to reclaim 1270 by 3:15. The index closed at 1271.50, 3.84% above its 50-day moving average (1224.43), closing above that average for the 88th consecutive day, and 10.67% above its 200-day moving average (1148.89). The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are positive. The SPX closed above its April highs for the 26th straight session and above 1270 for the fifth consecutive day. The directional momentum indicator is positive, with a stable trend. Relative strength fell to 70.27 from 72.97, an overbought range. Next resistance is at 1278.32; next support is at 1263.19.
BKX. On lower volume, the KBW bank index closed at 52.88, down 0.50 points or 0.94%. The index closed 24.20% above its August 30 closing low of 42.98, the trough of the recent prior correction, but 7.89% below its April 23 closing high.
Financials underperformed the market, and regionals underperformed large-cap banks. Like the broader markets, the BKX opened marginally higher, setting an intra-day high of 53.66 at 9:35. Financials traded back to break-even by 10:00 and traded sideways until the 10:30 Massachusetts court ruling sent the index sharply lower. Finding support at 52.20, financials attempted two brief rebounds but lost momentum quickly. Finding an intra-day low at 52.09 in conjunction with the broader markets, the BKX rallied in sympathy through the afternoon and closed 1.50% above its intra-day low. The index closed above 50 for the 15th straight day. Volume fell 4.04% to 188.85 million shares , down from 196.80 million shares Thursday, and above the 156.85 million share 50-day average.
Technical indicators are positive. The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (51.73, 48.70, 47.39, and 49.09, respectively), closing above the 200-day average for the 22nd straight session. The 20-, 50-, 100-, and 200-day averages all increased. The 50-day moving average closed (by -0.38 points) below the 200-day moving average, as it has since August 16, although the spread continues to tighten and signals a “golden” cross this week. The directional movement indicator is positive, but the trend is weakening. Relative strength fell to 63.67 from 68.33, the high end of a neutral range. Next resistance is 52.08; next support at 53.67.
Disclosure: I am long BAC, SNV, CMA.