This morning. Equity futures are mixed this morning, with March SPX futures at 1238.20, up +0.58 points after fair value adjustment. The SPX and DJI open today at fresh 2010 highs, but the equity uptrend is under pressure as markets consolidate substantial recent gains. Distribution days number 3 for the SPX and NYSE and 4 for the NASDAQ. Next SPX resistance is at 1246.80. Next support is at 1235.90.
In the financial sector, the Bank of Montreal announced that it will acquire Marshall & Isley (NYSE:MI) in a stock-for-stock deal, which at $7.00, an approximate 21% premium to MI’s closing price and below its $7.89 3Q2010 tangible book value. Other regional banks, notably RF, are higher this morning.
Asian equity markets closed mixed. The Nikkei, Hang Seng, and Shanghai indexes closed -0.07%, +0.20%, and -0.15%, respectively. European equity markets are lower, with the Eurostoxx50 -0.41%, FTSE -0.22%, and DAX -0.37%. On the EuroStoxx, financials are the worst performing market segment, down -1.14%.
Despite sovereign ratings downgrades, LIBOR trends remain unremarkable. Overnight USD LIBOR is 0.23813%, down from 0.23875% Thursday. USD 3-month LIBOR is 0.30375%, unchanged from the prior day. In early trading, the dollar weaker is slightly weaker against the euro, and stronger against the yen and pound. The euro trades at US$1.3258, compared to US$1.3244 the prior day and USD$1.3214 the day before. The dollar trades at ¥83.93, compared to ¥83.914 Wednesday and ¥84.24 the prior day. U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.621% and 3.380%, respectively, compared to 0.637% and 3.422% Wednesday. The yield curve spread narrowed to +2.759% from +2.785% 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 generally lower, with lower petroleum and natural gas, mixed precious metals, lower aluminum, copper, and agricultural prices.
U.S. news. The lame duck session of the 111th Congress continues to grind forward, passing the compromise tax legislation overnight, but struggling to move other spending initiatives forward. Today’s economic reporting will focus on the 10:00 release of leading economic indicators. This morning, the Bank of Montreal announced its stock-for-stock acquisition of M&I Corp.
Overseas news. Moody’s downgraded Ireland’s credit rating five notches to Baa1, three notches above non-investment grade. Unexpectedly, December German business confidence rose and is at the highest level on record since 1991 reunification. North Korea threatened South Korea with direct strikes should the South proceed with a Dec 18-21st scheduled military drill.
· MI – sold to BMO Financial in $4.1 billion all-stock transaction, valuing MI at $7.75 per share; MI’s 3Q10 tangible book was $7.94, compared to yesterday’s close of $5.79
· BBT – downgraded to underperform at Macquarie, $24 price target
· TCBI – downgraded to neutral at Macquarie, $23 price target
· V – downgraded to buy from conviction buy at Goldman Sachs
· WABC – downgraded to neutral at Macquarie, $52 price target
Thursday’s equity markets. Gains were modest, and the indexes never tested important resistance levels, but the action was encouraging. Markets managed to close higher despite transient morning weakness, continued weakness in financial stocks, and mixed news flows that could have provided ample support for a sell-off. Somewhat impressively, the market shrugged off negative news. The major indexes closed higher, and the SPX and DJI closed at new 2010 highs. Volume was lower. In December, the NASDAQ leads the other major indexes, up +5.57%, compared to the SPX, DJI, and NYSE, up +5.28%, +4.48%, and +5.51%, respectively. Despite yesterday’s gains and the new closing highs, the uptrend is under pressure as the market consolidates its recent gains.
Thursday, futures were lower, and the dollar was better behaved than on Wednesday, but markets opened weakly higher, then turned lower within the first 30 minutes. A better-than-expected Philadelphia Fed report seemed to spur investors’ risk appetites, and equities rallied through the morning, with financials the strongest segment. BAC rallied particularly, on news that implied constructive progress toward settlement of mortgage putback issues with investors in its RMBS. From $12.29 at the prior day’s close, BAC rallied to $12.77 after 2:00 pm, when the publication of the Fed staff proposed rule on debit card fees, required as a result of last summer’s financial “reform” legislation, resulted in an immediate sell-off in financial stocks, particularly those companies that bore any connection to consumer credit/debit cards. Visa (NYSE:V) ended down -12.7%, for example. BAC retreated to an intraday low of $12.38, but rallied in the final half-hour to close at $12.52, up +1.87% on the day. Most other financials also rebounded into the close, but well off earlier levels.
Trading desks report some selling of recent winners, again most evident in financial stocks, the day’s worst performing market segment for the 3rd consecutive day. Market breadth was positive, and up volume led down volume. Market segments ended mixed, but mostly higher. Industrials, consumer goods, and utilities were the best performers. Technology, telecommunications, and financials were the worst performers.
Technical indicators are generally positive. Major indexes are at least +9.12% higher in 2010, with the DJI and SPX at new yearly highs, and the NYSE and NASDAQ fractionally below their yearly highs. All major indexes closed above their respective 200-week and 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 have moved back into the upper end of a neutral range. Market volatility fell and remains in a complacent range. The VIX closed down -3.07% to 17.39 from 17.94 at Wednesday’s close. The VIX has closed below 18.0 for the past 8 trading days.
Market sentiment is improving. The latest week’s (December 16th) AAII Investor Bullish Sentiment index remains quite elevated, but fell -5.32% to 50.23 from 53.05 on December 9th. Sentiment indicators are highly variable, but this reading is probably best read as bearish.
For the 4th consecutive day, financial stocks underperformed, though the XLF, BKX, and KRX ending up +0.13%, +0.18%, and +0.69%, respectively. While the broader indices are near two year highs and have recovered their post-September 2008 losses, financial stocks have not, with the BKX closing -14.6% below its April highs and -40.5% below its best level in September 2008.
NYSE Indicators. Volume fell -10.9% to 989.84 million shares, from 1.111 billion shares the prior day, above the 1.042 billion share 50-day moving average. Market breadth was positive, and up volume exceeded down volume. Advancing stocks led decliners by +203 (compared to -965 Wednesday), or 2.09:1. Up volume led down volume by 2.78:1.
3Q2010 Earnings. Earnings results have generally exceeded EPS and revenue expectations. Of the 481 S&P500 companies that reported earnings to date, 76% (364 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, 381 companies (79%) reported increased revenues and 291 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 14.6x estimated 2010 earnings ($85.41) and 12.8x estimated 2011 earnings ($96.91), compared to 14.5x and 12.7x 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 +12.0%, +4.8%, and +5.6%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +13.5% and +28.7%, respectively.
Large-cap banks trade at a median 1.43x tangible book value and 13.4x 2011 earnings, compared to 1.45x tangible book value and 13.4x 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 +32.9% and expect 4Q2010 earnings to exceed 3Q2010 earnings by +24.8%. 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 +7.64 points, or +0.62% to 1242.87, its fifth increase in six sessions and at a new two-year closing high. Volume fell -10.8% to 782.82 million shares from 877.45 million shares Wednesday, below the 835.43 million share 50-day moving average. For the 41st consecutive day, its 50-day moving average closed above its 200-day moving average (1198.74 versus 1141.00, respectively). The SPX closed above its 200-week moving average (1186.65).
The SPX opened modestly higher on better jobless claims and housing starts data, but quickly retraced to the breakeven line. The 10:00 Philadelphia Fed manufacturing index, which unexpectedly rose in December, reversed the index’s early losses. In its on-going insider probe, news that the SEC had arrested another 4 traders was shrugged off, and stocks climbed above 1240 at 11:30. Markets traded up through 1241-level resistance at 1:00 and reached an intra-day high of 1243.75 around 2:00. The Fed staff’s debit fee proposal hit at 2:15, and financials sold off hard in response, halting the broader market’s momentum. The SPX still managed side-ways trading through the close. The SPX closed +3.83% above its 50-day moving average (1198.74), closing above that average for the 73rd consecutive day, and +8.98% above its 200-day moving average (1141.00). The SPX closed above its April-high closing level of 1217.28 for the 11th 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 eleventh straight session and set a new two-year closing high. The directional momentum indicator is positive, with a stable trend. Relative strength rose to 66.37 from 63.37, the high end of a neutral range. Next resistance is at 1246.80; next support is at 1235.90.
BKX. On lower volume, the KBW bank index closed at 49.48, up +0.09 points or +0.18%. The index closed +15.1% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -14.6% below its April 23rd closing high.
For the third straight day, financial stocks were the worst performing SPX market sector, mostly due to outsized V and MA losses from the Fed staff’s debit fee proposal. Large-caps underperformed regionals. The BKX gapped higher at the open, reflecting the prior evening’s reports of Bank of America/private MBS investor settlement discussions. BKX trading mirrored broader market activity, but percentage gains were larger. The BKX reached an intra-day high at 1:00, retaking the 50.0 level and achieving a +1.42% gain. The index traded sideways near the resistance (50.01) until Fed staff released its debit fee proposal at 2:15. The BKX fell sharply in the 2:00 hour, giving up the day’s entire gains and turning negative at 3:00. Finding stocks temporarily oversold, buyers returned and pushed the index to gains at the closing bell. The index closed at 49.48, up 0.09 points, its third straight sub-50 close. Volume fell -6.04% to 175.66 million shares, down from 186.95 million shares Wednesday and above the 169.53 million share 50-day average.
Despite this week’s sell-off, most technical indicators are positive. The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (47.43, 46.95, 46.75, and 48.98, respectively), closing above the 200-day average for the sixth straight session. The 20-, 50-, 100-, and 200-day averages all increased. The 50-day moving average closed (by -2.06 points) below the 200-day moving average, as it has since August 16th. The directional movement indicator is positive, with a stable trend. Relative strength rose to 60.29 from 59.86, moving into the upper end of a neutral range. Next resistance is 49.97; next support at 49.11.
Disclosure: I am long MI, BAC.