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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
  • Financials Soar on Improving Margin Prospects, Futures Again Edge Up 0 comments
    Dec 10, 2010 9:02 AM | about stocks: COF, PNC, USB, BAC, JPM, AXP, CMA, CYN, WTFC

     

    This morning.  Equity markets are in a confirmed uptrend, and the NASDAQ and SPX both open today at fresh 2010 highs.  Despite mixed news flows (generally negative developments out of China and Europe, with more positive news out of the U.S., especially on taxes and economic growth), U.S. equity futures are higher.  With the expiration of the December equity index futures, March SPX futures are up +4.60 points after fair value adjustment at 1232.00.  Next resistance is at 1236.19.  Next support is at 1228.33. 
     
    Asian equity markets closed lower, with the Nikkei -0.72% and Hang Seng -0.04%, as Chinese monetary authorities dialed up bank reserve requirements.  European equity markets are higher, with the Eurostoxx50 +0.08%, FTSE +0.06%, and DAX +0.64%.  On the EuroStoxx, financials are among the worst performing market segments after two days of exceptional gains.
     
    Overnight USD LIBOR is 0.23813%, down from 0.24000% Thursday, but above the November 0.22563% lows.  USD 3-month LIBOR is 0.30156%, down from 0.30219% yesterday, but above the +0.28438% lows of mid-November.  The dollar is slightly weaker in early trading vis a vis the euro, pound, and yen.  The euro trades at US$1.3246, compared to US$1.3239 the prior day and USD$1.3261 the day before.  The dollar trades at ¥83.58, compared to ¥83.76 Thursday and ¥84.04 the prior day.  U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.612% and 3.225%, respectively, compared to 0.620% and 3.204% Thursday.  The yield curve spread widened to +2.613% from +2.584% 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 higher petroleum and lower natural gas, mixed precious metals, lower aluminum and copper, and higher agricultural prices.
     
    U.S. news.  Economic reporting is light.  The initial October trade balance was -$38.7 billion, better than survey.  News is focused on economic improvement and upgrades of estimates of U.S. economic performance and S&P500 earnings.  Attention remains on the proposed tax compromise that will extend the Bush-era tax cuts in exchange for extending unemployment benefits.  In a non-binding resolution, Congressional democrats voted to reject the compromise, but the Senate is expected to pass the package Saturday. 
     
    Overseas news.  China raised reserve requirements on the largest banks to 18.5% from 18.0%, marking the third increase in five weeks.  Spain warned its next bond auctions on December 16th will see rising rates. 
     
    Company news/research:
     
    ·         COF – upgraded to buy at FBR Capital, price target increased to $53 from $45.
    ·         PNC, USB, BAC, and JPM – listed as favorite sector names at FBR Capital; price targets and outperform ratings reaffirmed for each
    ·         AXP – listed as one of 18 stocks to outperform in early 2011 at JPMorgan.
    ·         CMA, CYN – two of the top three larger-cap banks positioned for loan growth, according to JPMorgan.
    ·         WTFC – raised to outperform at Macquarie
    ·         JPM strategists raised 2011 S&P 500 EPS to $94 from $91, set a 2012 EPS of $102, and publish a 2011 target of 1,425 (15% above yesterday’s close, 14x 2012 EPS estimate of $102). 
     
    Thursday’s equity markets.  Thursday looked much like Wednesday, but with positive market breadth.  Most indexes closed modestly higher, but the DJI closed with a fractional loss.  Volumes declined.  On positive initial jobless claims news, markets opened higher, but quickly lost strength, perhaps on news that the House of Representatives rejected the proposed tax compromise.  Markets tested support at 1227 on the SPX just before noon, and then rallied mildly through the afternoon to close at 1233.00, up +0.38%.  Though the gains might appear small beer, the SPX succeeded in closing above resistance at 1228, the 3-year Fibonacci 61.8% “retracement” level, which technicians viewed as important test of market resistance.  The next Fibonacci resistance point is SPX 1361, representing a 76.4% retracement, another +11% higher.
     
    The week’s themes broke down a bit yesterday.  As seen in recent weeks, there’s a bid on weakness.  Negative news is shrugged off, as attention turns instead to improving economic growth assessments.  The NASDAQ and SPX closed at new yearly highs.  There’s relatively little short selling, according to trading desks.  Financials again far outperformed the broader markets, extending their month-to-date outperformance.  The BKX rose +2.23% and is up +12.4% in December.  The regional bank KRX index is up +10.6% month-to-date.  Treasuries’ weakness moderated, with the 10-year yield falling about -5 basis points to 3.22% after a very successful 30-year auction yesterday.  The yield curve has steepened appreciably in recent weeks, implying an improving outlook for bank net interest margins in 2011.  Commodity price pressures have clearly abated. 
     
    At the close, the NYSE, SPX, and NASDAQ outperformed with gains of +0.41%, +0.38%, and +0.29%, respectively, compared to the DJI, which ended -0.02% lower.  The NASDAQ and SPX closed at a new yearly highs.  In December, the NASDAQ leads the other major indexes, up +4.74%, compared to the SPX, DJI, and NYSE, up +4.44%, +3.31%, and 4.73%, respectively.  As noted above, segment strength has rotated to financials, with the BKX outperforming for the first time since early April. 
     
    Market breadth was positive.  Market segments were mixed.  Financials, telecommunications, and basic materials were the best performers.  Health care, consumer services, and technology were the worst.
     
    Market sentiment is improving.  The latest week’s (December 9th) AAII Investor Bullish Sentiment index rose +6.83% to 53.05 from 49.66 December 2nd , the highest reading since November 11th.  Sentiment indicators are highly variable, but this reading is probably best read as bearish.
     
    Technical indicators are improving.  Major indexes are at least +7.12% higher in 2010, with the NASDAQ and SPX at new yearly highs.  All major indexes closed above their 200-week moving averages.  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 are positive, and the trend is strengthening.  Short-term relative strength indicators moved into the upper end of a neutral range.  Market volatility ended slightly lower.  The VIX closed down -2.76% to 17.25 from 17.74 at Wednesday’s close. 
     
    Financial stocks again outperformed, with the XLF, BKX and KRX ending up +1.23%, +2.19%, and +1.34%, respectively.  While the broader indices have recovered most of their correction losses, financial stocks have not, with the BKX closing -13.2% below its April highs. 
     
    NYSE Indicators.  Volume fell -8.10% to 1.004 billion shares, from 1.093 billion shares Wednesday, but above the 1.053 billion share 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +354 (compared to -685 Wednesday), or 1.26:1.  Up volume led down volume by 2.48:1.
     
    3Q2010 Earnings.  Earnings results have generally exceeded EPS and revenue expectations.  Of the 476 S&P500 companies that reported earnings to date, 76% (362 of 476) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +6.4% (versus a historical average of +2%).  EPS is up +31.3% over the prior year.  Though challenged in the current operating environment, 379 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 ($85.34) and 12.7x estimated 2011 earnings (raised to $96.78 from $96.65), compared to 14.4x and 12.7x 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 +11.9%, +4.6%, and +5.5%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +13.4% and +28.7%, respectively.
     
    Large-cap banks trade at a median 1.48x tangible book value and 14.0x 2011 earnings, compared to 1.43x tangible book value and 13.7x 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 +33.9% 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.
     
    SPX.  On lower volume, the SPX rose +4.72 points, or +0.38% to 1233.00.  The index set a new 52-week closing high for the second consecutive session.  Volume fell -37.1% to 766.27 million shares from 850.42 million shares Wednesday, below the 845.28 million share 50-day moving average.  For the 35th consecutive day, its 50-day moving average closed above its 200-day moving average (1189.63 versus 1137.90, respectively).  The SPX closed above its 200-week moving average (1187.68). 
     
    The SPX opened higher on positive initial and continuing jobless claims data, trading in the 1233-34 range until 10:00.  The index retraced gains into negative territory through the rest of the morning, finding an intra-day low of 1226.85 just before noon.   For the 5th time in six sessions, the index rallied in afternoon trading from its intra-day, noon lows and close with daily gains.  The index failed to break through the year’s intra-day high of 1235.04, set on December 7th.  The index closed at 1233.00, above a closely watched Fibonacci level of 1228, representing a 61.8% recovery of the March 2009 lows.  Technicians claim a breakout above this level puts the next Fibonacci sequence level of 1361 (a 76.4% retracement) within the index’s sites.  Stock correlations continued to fall through the session, a bullish sign, reaching the lowest level since early May.  The SPX closed at a new 52-week high for the second straight session.  The SPX closed +3.65% above its 50-day moving average (1189.63), closing above that average for the 68th consecutive day, and +8.36% above its 200-day moving average (1137.90).  The SPX closed above its April-high closing level of 1217.28 for the sixth straight session.  The 20-, 50-, 100-, and 200-day moving averages rose.
     
    Technical indicators are positive.  The SPX closed above its April highs for the sixth straight session.  The directional momentum indicator is positive, with an increasing trend strength.  Relative strength rose to 65.22 from 63.60, the lower end of an overbought range.  Next resistance is at 1236.19; next support is at 1228.33.
     
    BKX.  On lower volume, the KBW bank index closed at 50.32, up +1.10 points or +2.23%.  The index closed +17.08% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -13.17% below its April 23rd closing high.
     
    Financial stocks again outperformed, and the bank sub-sector performing best in the SPX for the second straight session.  The large-cap financials outperformed the regionals.  Fueled by better initial and continuing jobless claims and wide Treasury spreads, the BKX again rose sharply at the open.  The index lost some gains through the morning with the broader market sell-off but never broke into negative territory.  A rally commenced just before noon, lifting the index an additional 2.0% through a 3:50 intra-day high of 50.42.  The BKX finished just off this level to close at 50.32, representing a 2.23% daily gain and the first close above 50.0 since August 2nd.  Volume fell -14.8% to 213.56 million shares, down from 250.78 million shares Wednesday and above the 166.89 million share 50-day average.  
     
    Technical indicators are positive.  The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (46.64, 46.64, 46.64, and 48.91, respectively), closing above the 200-day average for this second straight session.  The 20-, 50-, 100-, and 200-day averages all increased.  The 50-day moving average closed (by -2.27 points) below the 200-day moving average, as it has since August 16th.  The directional movement indicator is positive, with an increasing trend.  Relative strength rose to 69.53 from 65.47, moving into an overbought range.  Next resistance is 50.75; next support at 49.55.


    Disclosure: I am long BAC, USB, COF, AXP, JPM, PNC, CMA.
    Themes: SPX, BKX, CCMP, DJI, NYA, KRX, XLF Stocks: COF, PNC, USB, BAC, JPM, AXP, CMA, CYN, WTFC
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