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Gary Townsend
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Gary Townsend - Founding member and Chairman, GBT Capital Management, LLC, a macro long/short fund based in Chevy Chase, Maryland. Also, 2007-2013, a founding partner, CEO and Portfolio Manager of Hill-Townsend Capital LLC, a long/short equity financial sector fund. Mr. Townsend has 35 years... More
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GBT Capital Management LLC
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Listening to Markets
  • After FOMC Statement, Stocks Rally; Barney to Retire to CFPB? 0 comments
    Nov 4, 2010 9:10 AM | about stocks: XL, MS, FHN, WFC, JPM, STI, PNC, MTB, FITB, HBAN, RF
    This morning.  Equity markets are in a confirmed uptrend.  Yesterday, markets closed higher on increased volume.  For the first time in several days, financial stocks led markets higher, spurred by Federal Open Market Committee’s announced $600 billion quantitative easing and statement that interest rates will remain low for an extended period.  Recent distribution days number three (on October 15th, 19th, and 27th), with three for the DJI and NYSE, two  for the SPX, and 1 for the NASDAQ.  This morning, December SPX futures are at 1208.00, up +13.54 points after fair value adjustment.  Next resistance is at 1197.01; next support is at 1188.99.
    Technical indicators are generally positive and improving.  All major indexes closed above their 20-, 50-, 100-, and 200-day moving averages, their respective 50-day are above their 200-day moving averages, and only the NYSE composite closed below its 200-week moving average.  The NYSE composite index stands +14.1% above its August 26th closing low and at its best level since last April.  Directional movement indicators are positive, but trends are weak.  Relative strength indices have markets in a short-term overbought range.
    Asian equity markets closed higher, with the Nikkei and Hang Seng +2.17% and +1.62%, respectively.  European equity markets are also higher, with the Eurostoxx50 +1.88%, FTSE +1.73%, and DAX +1.50%.  On the EuroStoxx, financials are up +2.41%, the 3rd best performing market segment.  Despite strong equity markets, eurozone sovereign CDS spreads continue to widen, with Ireland at another record level, and Greece, Spain, and Portugal retesting recent highs. 
    Despite unfavorable sovereign CDS trends, LIBOR trends remain unremarkable.  Overnight USD LIBOR is 0.22563%, essentially unchanged from +0.22625% on September 30th.  USD 3-month LIBOR is 0.28563%, down from 0.29000% on the same date.  In currency markets, the dollar is weaker against the euro, pound, and yen.  The euro trades at US$1.4225, compared to US$1.4139 the prior day.  The dollar trades at ¥80.96, compared to ¥81.07 yesterday.  U.S. Treasuries are mixed, with the 2- and 10-year maturities yielding 0.328% and 2.552%, respectively, compared to 0.328% and 2.570% yesterday.  The yield curve spread widened immaterially to +2.224% from +2.242% 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.  With the weaker dollar, commodities are generally higher, with higher oil, precious metals,  but lower aluminum and copper, and higher agriculture prices.
    3Q2010 Earnings.  Earnings results have generally exceeded EPS and revenue expectations.  Of the 387 S&P500 companies that reported earnings to date, 76% (296 of 387) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +7.0% (versus a historical average of +2%).  EPS is up +34.4% over the prior year.  Though challenged in the current operating environment, 306 companies (79%) reported increased revenues and 234 companies (60%) 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 have disappointed slightly, missing expectations by -0.30% on average.
    U.S. news.  News focus is on the immediate implications of the FOMC action, and the classic trading response: Buy commodities and equities and sell Treasuries and the dollar.  Today’s economic reports include at 8:30, preliminary 3Q2010 non-farm productivity (+1.9%) and unit labor costs (-0.1%), and initial and continuing jobless claims (at 457K worse than survey 442K) for the latest week.  The September employment report is released Friday. 
    Political news.  The Financial Times reports that Rep. Barney Frank may retire from Congress and be appointed chairman of the new Consumer Financial Protection Bureau.  Bloomberg reports that Rep. Ed Royce (R-CA) will challenge Rep. Spence Bachus (R-AL) for chairman of the House Financial Services Committee.  Yesterday, Rep. Bachus sent a letter to the new Financial Stability Oversight Council slamming the Volcker Rule’s proprietary trading ban, stating that it “impose(s) substantial costs on the American economy and market participants” with doubtful benefits, forcing clients overseas to non-U.S. companies. 
    Overseas news.  The Bank of England held its asset purchase plan and benchmark interest rate constant, at 200 billion pounds and 0.5%, respectively.   In October, U.K. 3-month average home prices rose more than expected.  The IMF warned that some banks may struggle with the new Basel capital and liquidity requirements.  Spain sold 3.4 billion euros worth of five-year bonds, within the offering’s targeted allotment.  China will increase the number of mutual funds that can invest overseas to spur inflows into other emerging markets and slow the yuan’s appreciation. 
    Wednesday’s equity markets.  After a long election night, markets yawned through most of the day, but everyone jumped into the pool after the 2:15 pm release of the FOMC report.  Though all had been well-telegraphed, the markets response was volatile, spiking up, immediately down to an intraday low at 2:30 pm, and followed by a strong rebound to close at the intraday high and the best levels since last April.  Volumes improved on all major indexes.  Market breadth was positive, and up volume exceeded down volume.  All market segments closed higher, with financials, telecommunications, and technology the best performers, while health care, utilities, and basic materials fared worst.
    Market sentiment is increasingly bullish, but markets appear short-term overbought.  The uptrend that commenced on August 30th remains resilient.  All major index 50-day moving averages are above their respective 200-day moving averages.  The rally brought all major indexes back above their early August, then September, and now October highs, to levels last seen in late April, before the euro-crisis and flash crash.  All indexes are at least +5.89% higher in 2010.  Despite the broader market’s recovery, financial stocks are -20.6% below their April highs.  The latest week’s (November 4th) AAII Investor Bullish Sentiment index stood at 48.23, down from 51.23 on October 28th and comparing to a slow of 20.74 on August 26th.  This is probably better read as a bearish indicator.
    Technical indicators are improving.  Major indices are above their respective 20-, 50-, and 100-, and 200-day moving averages.  With 50-day moving averages back above respective 200-day moving averages, markets are in a generally bullish configuration.  For the 2nd consecutive day, the SPX closed above its 200-week moving average (1193.16), confirming similar positive DJI and NASDAQ trends.  The SPX had been below its 200-week MA since June 2008.  Directional movement indicators are positive with a stable trend.  Short-term relative strength indicators have moved back into an overbought range.  Market volatility is elevated, but the VIX closed down -10.4% to 19.56 from 21.57 at Tuesday’s close, below 20 for the 1st time in the past 7 sessions. sessions.
    Financials finally outperformed, after lagging for the past several days.  The XLF, BKX, and KRX closed up +0.99%, +1.93%, and +2.00%, respectively.
    NYSE Indicators.  Volume rose +21.6% to 1.103 billion shares, from 907.36 million shares the prior day, and compares to the 1.030 billion share 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +453 (compared to +1295 Tuesday), or 1.35:1.  Up volume led down volume by 1.72:1.
    ValuationThe SPX trades at 14.1x estimated 2010 earnings ($84.90) and 12.4x estimated 2011 earnings ($96.35), compared to 14.1x and 12.4x 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 +11.4%, +4.2%, and +4.8%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +13.5% and +28.5%, respectively.
    Large-cap banks trade at a median 1.40x tangible book value and 12.4x 2011 earnings, compared to 1.40x tangible book value and 12.0x 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 +34.6%.  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.
    SPX.  On lower volume, the SPX rose +4.39 points, or +0.37% to end at 1197.96, it best close since May 3rd.  Volume rose +23.5% to 859.41 million shares, from 695.84 million shares the prior day.  For the 9th consecutive day, its 50-day moving average closed above its 200-day moving average (1140.17 versus 1123.31, respectively).  For the 2nd consecutive day, the SPX  closed above its 200-week moving average (1193.16).
    Markets traded lower until the 2:15 release of the FOMC report.  After some initial to and fro to an intraday low of 1183.56 at 2:30, markets moved decisively higher, closing just below the intraday high of 1198.30.  The SPX closed +6.22% above its August 9th close of 1127.79 (the highest close prior to that month’s correction) and +4.38% above September’s closing high of 1147.70, and +1.04% above October’s closing high of 1185.64.  The SPX closed +5.07% above its 50-day moving average (1140.17), closing above that average for the 43rd consecutive day, and +6.69% above its 200-day moving average (1123.31), which trended higher on the day.  The SPX closed +12.5% above the 1064.59 close on the August 27th positive reversal, and +10.9% above the September 1st follow-through close of 1080.29.  The SPX closed -1.59% below its April 23rd closing high of 1217.28.  The 20-, 50-, 100-, and 200-day moving averages rose.
    Technical indicators are improving, as the SPX closed above its 20-, 50-, 100-, and 200-day moving averages, above its monthly August 7th, September 28th, and October 26th monthly highs, and for the 2nd consecutive day, above 1193, the 200-week moving average and a recent resistance point.  For the 9th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average.  The directional momentum indicator is positive, with a stable trend.  Relative strength rose to 70.22 from 68.37, moving further into a short-term overbought range.  Next resistance is at 1202.99; next support is at 1188.25.
    BKX.  On higher volume, the KBW bank index closed at 45.99, up 0.87 points or 1.93%.  The index closed +7.00% above its August 30 closing low of 42.98, the trough of the recent correction, but -20.6% below its April 23rd closing high, still very much in bearish territory.
    For the first time in several days, financial stocks outperformed the broader indexes.  The BKX opened higher and held its gains throughout the day, even as the broader markets traded lower.  After 2:15, the BKX traded down to an intraday low of 45.12, equal to the prior day’s close, but quickly rallied to close at the day’s high.  Volume rose +29.0% to 115.58 million shares, from 89.61 million shares the prior day, but well below the 143.90 million shares 50-day average.
    Technical indicators are generally negative.  The BKX closed below its 20-, 50-, 100-, and 200-day moving averages (46.19, 46.14, 47.01,and 48.81, respectively).  The 20-, 50-, 100-, and 200-day moving averages trended lower.  The 50-day moving average closed (by -2.67 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 49.27 from 40.91, moving from oversold to the middle of a neutral range.  Next resistance is 46.29; next support at 45.41.
    Company news & research:
    ·         XL – downgraded to neutral at UBS, price target of $22
    ·         MS – WSJ reports MS may delay its acquisition of Smith Barney joint venture from Citi to preserve capital under new Basel III requirements.  MS can start buying incremental pieces of Smith Barney in 2012. 
    ·         The Boston BancAnalysts’ conference begins today with presentations from FHN, WFC, JPM, STI, PNC, MTB, FITB, HBAN, and RF.

    Disclosure: Long XL, MS, WFC, JPM, PNC, HBAN
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