This morning. Equity futures are slightly higher after fair value adjustment, as earnings season moves into a higher gear. Results have generally substantiated positive economic views, though outside JPMorgan’s upside surprise last Friday, more recent reports by financials have generally met consensus expectations, but disappointed higher whisper numbers. Asian markets closed higher on reduced inflationary expectations. European markets are mixed. In the U.S., March SPX futures are at 1291.80, up +1.50 points after fair value adjustment.
Tuesday, the major indexes closed higher, reversing a lower open and morning weakness. Volumes increased. All closed at fresh multi-year highs. Market breadth was positive, though up volume trailed down volume, largely on the impact of a negative Citigroup (NYSE:C) trade. Markets are in a confirmed uptrend. The number of recent distribution days (index losses of more than -0.25%, on increased volume in the past 25 trading days) was unchanged for the major indexes. The BKX added a distribution day, increasing the number to 4. Next SPX resistance is at 1297.33. Next support is at 1291.43.
On increased volume, Asian equity markets closed higher, emphatically extending the prior day’s gains on news reports that inflation slowed in December. The Nikkei, Hang Seng, and Shanghai closed +0.36%, +1.10%, and +1.81%, respectively. On the SHCOMP, volume rose +1.81%, with industrials, basic materials, and technology the best performers. Financials were the worst performer, but ended +0.65% higher. SHCOMP distribution days number two since markets confirmed a new uptrend on December 28th. European equity markets are lower. The Eurostoxx50, FTSE, and DAX are down -0.18%, -0.39%, and -0.06%, respectively. On the EuroStoxx, financials are the middling performers, down -0.22%.
LIBOR trends remain unremarkable. Overnight USD LIBOR is 0.23688%, down from 0.24000% Tuesday and 0.25188% at year-end. USD 3-month LIBOR is 0.30313%, unchanged since January 6th and compared to 0.30281% at year-end. In early trading, the dollar is weaker against the euro, pound, and yen. The euro trades at US$1.3472, compared to US$1.3387 Tuesday and US$1.3294 the prior day. The euro’s recent upward move has erased the prior week’s technical breakdown, rising back above its 50-, 100-, and 200-day moving averages. The dollar trades at ¥82.25, compared to ¥82.56 Tuesday and ¥82.68 the prior day. Treasury yields are slightly higher, with 2- and 10-year maturities yielding 0.593% and 3.370%, respectively, compared to 0.585% and 3.366% Tuesday. The yield curve spread narrowed to +2.777% compared to +2.781% 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 +2.89% on February 17, 2010. Commodities are higher, with higher petroleum and higher natural gas, precious metals, aluminum and copper, and agricultural prices.
U.S. news. ABC consumer confidence for the latest week declined to -43 from -40. MBA mortgage applications rose +5.0%. December’s housing starts and building permits report is expected at 8:30.
Overseas news. The Polish central bank increases its benchmark interest rate +25 basis points to 3.75%. The Euro-zone Finance Ministers’ meeting concluded without a bailout fund restructuring agreement. Pressure mounted on the UK Commission on Banking to tackle the “Too Big To Fail” problem in its banking industry restructuring recommendations. German officials raised the country’s 2011 growth estimates to +2.3% from +1.8%. Today, yields fell more than expected at Portugal’s 12-month bill auction.
· WFC – reports 4Q10 GAAP EPS of $0.62 and operating EPS of $0.74, beating estimates of $0.63;
· BK - reports 4Q10 GAAP EPS of $0.55 and operating EPS of $0.61, beating estimates of $0.57;
· USB – reports 4Q10 GAAP EPS of $0.49 and operating EPS of $0.46, in-line with estimates of $0.47;
· GS – reports 4Q10 GAAP EPS of $3.79 and operating EPS of $3.79, in-line with estimates of $3.79;
· STT – reports 4Q10 GAAP EPS of $0.43 and operating EPS of $0.87, in-line with estimates of $0.86;
· NTRS – reports 4Q10 GAAP EPS of $0.59 and operating EPS of $0.64, missing estimates of $0.72;
Tuesday’s equity markets. The major indexes extended their seven week rally, reversing higher on increased volume as investors again bought on weakness. All ended at fresh multi-year highs. Markets shrugged off Citigroup’s (C) negative earnings surprise, and led by oil and gas, basic materials, and industrials ended with modest gains. Consumer goods, financials, and telecommunications were the worst performers and ended lower. The SPX closed at 1294.70, its best close since August 2008. Commodity producers led the rally, with Alcoa (NYSE:AA) and Exxon (NYSE:XON) rose at least 1.1 percent, with dollar weakness supporting higher commodity prices.
Technical indicators are positive. Markets are in a confirmed uptrend that began in early September, which after consolidating in November, extended further over the past 7 weeks. All major indexes closed above their respective 200-week and 20-,50-,100- and 200-day averages. Markets are in a bullish configuration, with the 50-day moving averages above respective 200-day moving averages. Relative strength indicators suggest that the market is overbought, though markets currently trade at large discounts to average price/earnings multiples.
Market volatility indicates continued complacency. The VIX rose +2.65% at the close, but reached an intraday high of 16.19 before closing at 15.79. The latest week’s (January 13th) AAII Investor Bullish Sentiment index fell -6.34% to an elevated 52.34, from 55.88 on January 6th, but below the 63.30 reading of December 23rd. Sentiment indicators are highly variable and are often best read as contrarian in their aspect.
Financial stocks closed mixed, with the XLF, BKX, and KRX -0.60%, -1.15%, and +1.06%, respectively, as Citigroup’s (C) earnings report disappointed, but Comerica’s (NYSE:CMA) acquisition of Sterling Bancorp (NASDAQ:SBIB) lifted smaller regional stocks. 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 -6.70% below its April 2010 highs and -34.5% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume rose +15.9% to 1.228 billion shares, from 1.060 billion shares Friday, and compares to a 985.8 million share 50-day moving average. Market breadth was positive, but up volume lagged down volume. Advancing stocks led decliners by +250 (compared to +461 Friday), or 1.18:1. Up volume trailed down volume by 0.76:1.
4Q2010 Earnings. The quarter’s first earnings results have so far exceeded EPS and revenue expectations. Of the 16 S&P500 companies that reported earnings to date, 75% (12 of 16) beat operating EPS estimates, versus the historical average of 62%. Companies beat by an average of +5.50% (versus a historical average of +2%). EPS is up +233.7% over the prior year (mostly driven by Apple’s earnings last night). Though challenged in the current operating environment, 13 companies (81%) reported increased revenues and 13 companies (81%) beat revenue estimates.
With 10 of the 24 BKX members reporting as of last evening, 60% (6 out of 10) beat operating EPS estimates. Bank revenues have exceeded expectations, beating estimates by +7.5% on average.
Valuation. The SPX trades at 13.6x estimated 2011 earnings ($95.40) and 12.0x estimated 2012 earnings (raised to $108.12 from $107.59), compared to 13.6x and 12.0x respective 2011-12 earnings yesterday. The 10-year average median Price/Earnings multiple is 20.0x. Since the beginning of 2010, analysts increased 2011 and 2012 earnings estimates by +3.1%, and +3.9%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +19.0% and +34.9%, respectively.
Large-cap banks trade at a median 1.58x tangible book value and 14.3x 2011 earnings, compared to 1.59x tangible book value and 14.2x 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 +34.3%. Analysts’ estimates for bank 4Q2010 earnings are 18.9% 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 3Q2010, 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 higher volume, the SPX rose +1.78 points, or +0.14% to 1295.02, setting a new two year high. Volume rose +15.5% to 986.04 million shares from 853.80 million shares Friday, above the 775.69 million share 50-day moving average. For the 62nd consecutive day, its 50-day moving average closed above its 200-day moving average (1235.19 versus 1152.16, respectively). The SPX closed above its 200-week moving average (1183.21).
The SPX opened lower, rallied to breakeven by 9:35, but promptly sold-off to its intra-day low of 1290.16 at 9:54. The index fluctuated between gains and losses through the morning. Finding support at the 1293 through the 12:00 hour, the index turned positive for good by 1:00. The intra-day high of 1296.06 came at 3:42, and the index sold-off mildly into the close, finishing at 1295.02. The index closed +4.84% above its 50-day moving average, closing above that average for the 94th consecutive day, and +12.40% above its 200-day moving average. The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are positive. The SPX closed above its April highs for the 32nd straight session and above 1290 for the second straight session. The directional momentum indicator is positive, with an increasing trend. Relative strength rose to 77.33 from 76.72, an overbought range. Next resistance is at 1297.33; next support is at 1291.43.
BKX. On higher volume, the KBW bank index closed at 54.07, down -0.63 points or -1.15%, yielding a distribution day. The index closed +25.80% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -6.70% below its April 23rd closing high.
Financials underperformed the market, and large-cap banks underperformed regionals’ gains. Citigroup’s fourth-quarter earnings miss and Comerica’s fully-priced acquisition of Sterling Bancshares disappointed investors. The index gapped lower at the open and sank through 10:15. A small rally was quickly sold, and the index set its intra-day low of 53.80 (a -1.66% drop) by 11:00. Buyers again stepped in and lifted financials at noon. Less selling pressure met the rally. The index retained moderate positive momentum through the afternoon. The BKX met consistent resistance at 54.20 between 2:00 and 3:45, and the index sold-off into the close. The index closed above 50 for the 20th straight day. Volume rose +39.445% to 314.94 million shares, up from 225.84 million shares Friday, and above the 162.79 million share 50-day average.
Technical indicators are positive. The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (53.01, 49.76, 48.05, and 49.12, respectively), closing above the 200-day average for the 28th straight session. The 20-, 50-, 100-, and 200-day averages all increased. The 50-day moving average closed (by +0.64 points) above the 200-day moving average, closing above it for the fourth straight day. The directional movement indicator is positive, with a stable trend. Relative strength fell to 64.34 from 69.97, the high end of a neutral range. Next resistance is 54.59; next support at 53.67.
Disclosure: I am long C, GS, WFC, STT, USB, CMA.