This morning. Equity markets are in a confirmed uptrend. Among the major indexes, only the NYSE composite closed lower, off -0.11% on lower volume, after equity markets staged a late rebound. Recent distribution days number four (on September 21st, 30th, October 15th and 19th), with two for the DJI and NASDAQ, three for the SPX, and four for the NYSE composite. December SPX futures are at 1179.00, up +2.34 points after fair value adjustment. Next resistance is at 1189.40; next support is at 1171.14.
Technical indicators are mixed, but improving. All major indexes closed above their 20-, 50-, 100-, and 200-day moving averages. The NYSE composite index stands +12.8% above its August 26th closing low. Yesterday, the NASDAQ 50-day moving average crossed above 200-day moving average for the 1st time since July 14th, joining the DJI and NYSE composite, whose 50-day crossed above 200-day moving averages on October 1st and 15th, respectively. Directional movement indicators are positive. Relative strength indices are at the top of a neutral range.
Overnight USD LIBOR is 0.22563%, compared to 0.22688% the prior day. USD 3-month LIBOR is unchanged at 0.28844%. Asian equity markets closed mixed, with the Nikkei and Hang Seng +0.54% and +-0.56%, respectively. European equity markets are narrowly lower, with the Eurostoxx50 -0.15%, FTSE -0.36%, and DAX -0.05%. EuroStoxx financials are down -0.01%, the 3rd best performing market segment. Eurozone sovereign CDS spreads are mixed. In currency markets, the dollar and yen are slightly stronger, while the pound and euro are weaker. The euro trades at US$1.3914, compared to US$1.3920 yesterday. U.S. Treasuries are mixed compared to Friday, with the 2- and 10-year maturities yielding 0.351% and 2.538%, respectively, compared to 0.351% and 2.545% on Wednesday. The yield curve spread widened to +2.187%, from +2.194% 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 oil, lower precious metals, lower aluminum and copper, and generally higher agriculture prices.
Earnings season. Earnings results have generally exceeded EPS and revenue expectations. Of the 125 S&P500 companies that reported earnings to date, 85.6% (107 of 125) beat operating EPS estimates, versus the historical average of 62%. Companies beat by an average of +10.5% (versus a historical average of +2%). EPS is up +53.4% over the prior year. Despite the challenging operating environment, 98 companies reported increased revenues, and 80 companies beat revenue estimates, though the average surprise of +0.58% is modest. With 22 of 24 BKX members reporting, 81.8% (18 out of 22) beat operating EPS estimates with a +25.8% average operating EPS surprise. Bank revenues have disappointed slightly, by -0.31%.
U.S. news. Earnings continue to dominate. No major economic reports are scheduled today. In South Korea, the Group of 20 finance ministers are discussing currency and trade, but no substantive agreement is expected. Bloomberg reports that U.S. government purchases of MBS under the PPIP returned nearly 36% in the past year. The FT reports that regulators have relaxed their position on dividend increases and share repurchases.
Overseas news. Greek 1-year credit default swaps priced below 10-year swaps, a sign investors think an imminent default is less likely. The October German business sentiment survey showed higher readings for both the current and future environments, beating estimates for declines. The Irish government proposed a 0.2:1 debt swap of government guaranteed bonds for Anglo-Irish debt.
Wednesday’s equity markets. Equity markets closed narrowly mixed, on lower volume. The SPX, DJI, and NASDAC ended with fractional gains; the NYSE composite closed down -0.11%. Early strength gave way to mid-day weakness, as the dollar strengthened after supportive remarks from the Treasury secretary. Market breadth was slightly negative. Market segments closed mixed, with consumer services, industrials, and health care the best performers, while financials, utilities, and telecommunications were the worst performers.
Earnings continued to surprise positively, but a stronger dollar took the starch out of equity markets. Equity markets gapped higher to nearly 1190 on the SPX and 11200 on the DJI by 12:30, but after 10:00, the dollar strengthened throughout the day, and equity markets have recently traded inversely to such strength. Notably, the SPX closed above 1180, rallying into the close.
Market sentiment remains variable, as there have been several failed uptrends in recent months. The sustainability of the current uptrend has its skeptics, but the uptrend has been resilient. Political uncertainties ahead of the mid-term elections are the principal negative, but the September-October rally has taken all major indexes back above their early August and then September highs, to levels last seen in early May, before the euro-crisis and flash crash. All indexes are at least +4.60% higher in 2010. The latest week’s (October 21st) AAII Investor Bullish Sentiment index stood at 49.62, up from 47.10 on October 14th, but up from 42.53 on September 30th and 20.74 on August 26th, the 52-week low. This is probably better read as a bearish indicator. Despite the broader market’s recovery, financial stocks remain more than -20.9% below their April highs. Tax uncertainties, dollar weakness, and the flatter yield curve qualify as additional market negatives.
Technical indicators are mixed, but improving. Major indices are above their respective 20-, 50-, and 100-, and 200-day moving averages. Yesterday, for the 1st time since June 14, the NASDAQ 50-day moving average crossed above its 200-day moving average, joining the DJI and NYSE composite in this bullish configuration. Based on current trends, the SPX 50-day moving average appears likely to cross above its 200-day moving average next week. Directional movement indicators are mixed, and short-term relative strength indicators moved slightly higher into the low-end of an overbought range. Market volatility is elevated, but trending lower. The VIX closed down -2.63% to 19.27 from 19.79 at Wednesday’s close, below 20 for the 8th day out of the past 9 days.
Financials underperformed the broader markets. The XLF, BKX, and KRX closed mixed, -0.03%, +0.09%, and -0.55%, respectively.
NYSE Indicators. Volume fell -4.10% to 1.056 billion shares, from 1.101 billion shares the prior day, and compared to the 1.030 billion share 50-day moving average. Market breadth was slightly negative, and up volume trailed down volume. Advancing stocks lagged decliners by -59 (compared to +1566 Wednesday), or 0.96:1. Up volume lagged down volume by 0.8:1.
SPX. On lower volume, the SPX rose +2.09 points to close at 1180.26, closing above 1180.26 for the 2nd time this week. Volume declined -8.50% to 832.5 million shares, from 909.8 million shares the prior day.
The SPX gapped higher at the open, testing resistance at 1190 through most of the morning and reaching an intraday high of 1189.43 shortly after 11:00. Morning strength gave way to profit taking through 2:00, when the SPX touched an intraday low of 1171.17, before rallying to close with a fractional +0.18% gain. The SPX closed +4.65% above its August 9th close of 1127.79 (the highest close prior to that month’s correction) and +2.84% above last month’s closing high of 1147.70 on September 28th. The SPX closed +5.25% above its 200-day moving average (1121.35), which trended higher on the day, and +5.32% above its 50-day moving average (1120.48), closing above that average for the 35th consecutive day. The SPX closed +10.9% above the 1064.59 close on the August 27th positive reversal, and +9.25% above the September 1st follow-through close of 1080.29. The SPX closed -3.04% below its April 23rd closing high of 1217.28. The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are mixed, as the SPX closed above its 200-day moving average for the 29th consecutive day, above its monthly August 7th and September 28th highs, and above 1180, the principal recent resistance point. Its 50-day moving average has yet to recapture its 200-day moving average (1120.48 versus 1121.35, respectively), but given recent trends, it appears likely that this will resolve itself next week, confirming similar positive technical developments on the DJI, NYSE composite, and NASDAQ. The momentum indicator is positive, and the trend is stable. Relative strength rose to 63.78 from 63.05, moving into a short-term overbought range. Next resistance is at 1189.40; next support is at 1171.14.
BKX. On lower volume, financial stocks reversed the prior two days’ losses, closing up +2.98% at 46.59, back above the 50-day moving average. From oversold levels, the BKX opened higher, with its strongest move in the 1st hour, but gaining throughout the day to close just below the intraday high of 46.62. The index closed +8.40% above its August 30 closing low of 42.98, the trough of the recent correction.
Volume fell to 205.57 million shares, down -5.46% from 217.45 million shares Tuesday, and above the 144.46 million share 50-day average. The BKX closed -21.0% below its 57.95 April 23rd closing high.
Technical indicators are mixed. The BKX closed below its 20-, 50-, 100-, and 200-day moving averages (46.70, 46.09, 47.26, and 48.87, respectively). The 200-day moving average moved higher. The 20-, 50-, and 100-day moving averages trended lower. The 50-day moving average closed (by -2.78 points) below the 200-day moving average, as it has since August 16. The directional movement indicator is negative, with a stable trend. Relative strength rose to 45.31 from 45.05, in the lower end of a neutral range. Next resistance is 46.43; next support at 45.37.
Valuation. The SPX trades at 14.0x estimated 2010 earnings (revised up to $84.19 from $84.13) and 12.3x estimated 2011 earnings (revised up to $96.04 from $95.91), compared to 14.0x and 12.3x 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 +10.4%, +3.8%, and +4.7%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +14.1% and +29.4%, respectively.
Large-cap banks trade at a median 1.45x tangible book value and 12.1x 2011 earnings, compared to 1.45x tangible book value and 12.1x 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 +35.7%. In 3Q2009, large-cap banks earned a combined $5.91 per share while the BKX Index earned -$1.24 per share. In 3Q2010, earnings estimates call for $13.79 and $0.60 per share, respectively.
Company news & research:
· AXP -- reported GAAP and operating EPS of $0.90, beating estimates of $0.86. Marketing and rewards costs were higher than forecasts, showing AXP’s continued commitment at reinvesting in its business.
· CYN – reported GAAP EPS of $0.65 and operating EPS of $0.76, beating estimates of $0.56.
· KEY – reported GAAP EPS of $0.20 and operating EPS of $0.17 per share, beating estimates of $0.03. Provision expense declined by -$134 million vs. the prior quarter (to $94 million from $228 million), while net charge-offs declined by -$82 million (to $357 million from $435 million). Nonperforming assets declined by -$285 million vs. the prior quarter (compared to a -$342 million decline from 1Q10 to 2Q10) to $1.8 billion from $2.1 billion. NIM increased 18 basis points to 3.35% on significantly lower CD costs (-42 basis points).
· PBCT – reported GAAP EPS of $0.07 and operating EPS of $0.08, missing estimates of $0.10.
· MS – reassured employees of no new layoffs following its latest earnings release.
· STT – agreed to acquired Bank of Ireland Asset Management for $57 million.
· AIG – prices its AIA deal at HK$19.68 per share and increased the deal size by 20% to around $20 billion.
Disclosure: Long AXP, MS, STT