This morning. Equity futures are rebounding after yesterday’s losses. March SPX futures are at 1281.50, up +4.89 points after fair value adjustment. Next SPX resistance is at 1285.32. Next support is at 1273.23. Asian markets were mixed, though the Shanghai composite, whose uptrend is under pressure, rebounded strongly today on views that the recent sell-off was overdone. European markets are higher, too, on news that government backing of Royal Bank of Scotland assets may no longer be necessary. Other reports focus on upgraded analysts’ expectations for Eurozone equity performance in 2011, based on an improving sovereign debt outlook.
Yesterday’s losses narrowed significantly after an impressive afternoon rally. The NASDAQ ended with the greatest loss, down -0.77%, followed by the NYSE composite, down -0.35%, both on higher volume. After early losses of more than -1%, the DJI and SPX closed with minimal -0.02% and -0.13% losses. Both briefly traded into positive ground, before losing momentum at the close. The KBW bank index (BKX) also ended with an immaterial -0.09% loss. Market breadth and volume were negative, but in contrast to Wednesday’s trade, investors bought the weakness, returning to recent form. Despite new distribution days for the NASDAQ and NYSE, U.S. equity markets remain in a confirmed uptrend.
The Nikkei, Hang Seng, and Shanghai closed down -1.76%, -0.53%, and +1.41%, respectively. On the SHCOMP, volume rose +11.1%, with telecommunications, industrials, and financials the best performers, all ending at least +1.63% higher. Distribution days number three since markets confirmed a new uptrend on December 28th, but the uptrend is under pressure as monetary authorities ratchet up interest rates. European equity markets are mixed. The Eurostoxx50, FTSE, and DAX are higher, +1.68%, +0.60%, and +0.84%, respectively. On the EuroStoxx, financials are the outperforming, up +2.91%.
LIBOR trends remain unremarkable. Overnight USD LIBOR is 0.23688%, unchanged from Tuesday and down from 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$1.3529, compared to US$1.3473 Thursday and US$1.3473 the prior day. The euro’s recent upward move has erased the prior week’s technical breakdown, closing for the 3rd consecutive day above its 50-, 100-, and 200-day moving averages. The dollar trades at ¥82.78, compared to ¥83.01 Thursday and ¥82.02 the prior day. Treasury yields are slightly lower, with 2- and 10-year maturities yielding 0.617% and 3.428%, respectively, compared to 0.625% and 3.449% Thursday. The yield curve spread narrowed to +2.811% compared to +2.824% 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 mixed, with higher petroleum and natural gas, lower precious metals, aluminum and copper, and mixed agricultural prices.
U.S. news. News flows are light today, with the focus turning next week to the November CaseShiller home price report, new home sales, and various regional manufacturing reports.
Overseas news. The Royal Bank of Scotland and its regulators are discussing an end to insurance of its “toxic” assets, as capitalization, market conditions, and valuations improve. Spain may force its “Caja” banks to go public, increasing the country’s fiscal health transparency. In January, German business confidence rose more than expected, hitting a new record high. China may raise minimum wages by 10% this year. For the first time in seven months, Japan upgraded its economic assessment.
· COF – last evening, COF reported 4Q10 GAAP and operating EPS of $1.52 and $1.55, respectively, compared to estimates of $1.29
· CYN – last evening, CYN reported 4Q10 GAAP and operating EPS of $0.86 and $0.88, respectively, compared to estimates of $0.69; CYN also doubled its dividend to $0.20 per share from $0.10.
· PBCT – announced acquisition of DNBK for $23 per share, a 35% premium to the closing price and 1.8x DNBK’s 3Q10 tangible book value.
· BBT – reported 4Q10 GAAP and operating EPS of $0.30 and $0.21, respectively, compared to estimates of $0.25
· STI – reported 4Q10 GAAP and operating EPS of $0.23 and $0.10, respectively, compared to estimates of $0.09
· BAC – reported 4Q10 GAAP and operating EPS of -$0.16 and $0.05, respectively, compared to estimates of $0.20
4Q2010 Earnings. The quarter’s first earnings results have so far exceeded EPS and revenue expectations. Of the 29 S&P500 companies that reported earnings to date, 79% (23 of the 29) beat operating EPS estimates, versus the historical average of 62%. Companies beat by an average of +4.2% (versus a historical average of +2%). EPS is up +113.1% over the prior year. Though challenged in the current operating environment, 21 companies (72%) reported increased revenues and 20 companies (69%) beat revenue estimates.
With 10 of the 24 BKX members reporting, 70% (7 out of 10) beat operating EPS estimates. Bank revenues have exceeded expectations slightly, beating estimates by +0.5% on average. Seven banks (70%) reported increased revenues over the prior year’s quarter.
Thursday's equity markets. The major indexes reversed and rallied impressively through most of the afternoon as investors finally found the selling overdone and bought the weakness. At 10:00, existing home sales provided some support, but selling pressure built again after 11:00, pushing most indexes at least -0.80% lower. Mixed and noisy earnings reports brought some early confusion. For example, Morgan Stanley (NYSE:MS) handily beat estimate on an operating basis ($0.59 versus $0.28), but media reports from Reuters, Bloomberg, and others reported its as a miss. The stock traded lower around 10:30, when it reversed and rallied throughout the day to end up +4.98%, at $29.01 and just off its intraday high. At day’s end, consumer services, utilities, and financials were the best performing market segments, up at least +0.51%. Oil and gas, technology, and basic materials were the worst performers.
Technical indicators are positive. Markets are in a confirmed uptrend that began in early September, which after consolidating in November, have extended further over the last several weeks. Major indexes are lower this week. All of the major indices closed above their respective 200-week and 20-50-100-, and 200-day averages. Markets are in a bullish configuration, with 50-day moving average above their respective 200-day moving averages. The relative strength indicators retreated slightly to 62.43 on the NYSE composite, from 63.40 on Wednesday.
Market volatility indicates continued complacency, though volatility rose for the 3rd consecutive day. The VIX rose +3.93% to 17.99 from 17.67 at the previous day’s close, but intraday, the VIX peaked at 18.85, the highest reading since early December.
Financial stocks closed mixed, with the XLF, BKX, and KRX +0.49%, -0.09%, and -0.62%, respectively, though well above intraday lows. 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 -9.01% below its April 2010 highs and -36.1% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume rose +9.30% to 1.190 billion, from 1.089 billion shares Wednesday, and compares to a 988.3 million share 50-day moving average. Market breadth was negative, and up volume lagged down volume. Advancing stocks trailed decliners by -722 (compared to -1667 Wednesday), or 0.61:1. Up volume trailed down volume by 0.86:1.
4Q2010 Earnings. The quarter’s first earnings results have so far exceeded EPS and revenue expectations. Of the 49 S&P500 companies that reported earnings to date, 71% ( of the 49) beat operating EPS estimates, versus the historical average of 62%. Companies beat by an average of +4.5% (versus a historical average of +2%). EPS is up +94.9% over the prior year. Though challenged in the current operating environment, 35 companies (71%) reported increased revenues and 37 companies (76%) beat revenue estimates.
With 17 of the 24 BKX members reporting, 71% (65 out of 17) beat operating EPS estimates. Bank revenues have exceeded expectations slightly, beating estimates by +1.0% on average. Thirteen banks (76%) reported increased revenues over the prior year’s quarter.
Valuation. The SPX trades at 13.4x estimated 2011 earnings (revised up to $95.64 from $95.58) and 11.8x estimated 2012 earnings ($108.39), compared to 13.4x and 11.8x 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 +3.4%, and +4.1%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +19.3% and +35.2%, respectively.
Large-cap banks trade at a median 1.54x tangible book value and 11.1x 2011 earnings, compared to 1.54x tangible book value and 13.6x 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 fell -1.66 points, or -0.13% to 1280.26. Volume rose +15.4% to 957.10 million shares from 829.10 million shares Wednesday, above the 777.39 million share 50-day moving average. For the 64th consecutive day, its 50-day moving average closed above its 200-day moving average (1237.45 versus 1153.12, respectively). The SPX closed above its 200-week moving average (1183.14).
The SPX opened lower and moved quickly down to first resistance at 1275 by 9:40. A sharp reversal took the index back to break-even by 10:00, but sellers won back momentum. The SPX again moved sharply down, bouncing slightly off of resistance again before breaking through on the downside by 10:45. The index continued to decline through the morning and set its intra-day low of 1271.26 at 11:33, down -0.85%. Buyers stepped in at the low and swung momentum to the upside. The index rallied straight through 2:45, retaking the break-even line by 2:30 and setting its high of 1283.35 at 2:45. The index sold-off mildly into the close and finished with a modest loss at 1280.26. The index closed +3.46% above its 50-day moving average, closing above that average for the 96th consecutive day, and +11.03% 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 34th straight session and above 1280 for the sixth straight session. The directional momentum indicator is positive, with a declining trend. Relative strength fell to 62.43 from 63.91, the higher end of a neutral range. Next resistance is at 1285.32; next support is at 1273.23.
BKX. On higher volume, the KBW bank index closed at 52.73, down -0.05 points or -0.09%. The index closed +22.68% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -9.01% below its April 23rd closing high.
Financials outperformed the market, and large-cap banks outperformed regionals. Banks stocks fluctuated in early trading as investors digested pre-market earnings releases. The BKX dropped sharply at the open, setting an intra-day low of 52.15, for a -1.22% drop, at 9:36. Rebounding as sharply as it dropped, the index retraced losses completely at 10:00. Sellers retook momentum, pushing the index back to the 52.20 level at 11:00. The index staged a gradual positive rally through the rest of the morning and through early afternoon. Turning positive at 2:05, the BKX set an intra-day high of 52.95 at 2:33. A slight sell-off into the close left the index with a small loss. The index closed above 50 for the 22nd straight day. Volume rose +14.5% to 211.03 million shares, up from 184.25 million shares Wednesday, and above the 161.73 million share 50-day average.
Technical indicators are mostly positive. The BKX closed above its 50-, 100-, and 200-day moving averages (49.81, 48.11, and 49.11, respectively), closing above the 200-day average for the 29th straight session. The index closed below its 20-day moving average (52.99) for the second straight session. The 20-, 50-, and 100-day averages increased while the 200-day decreased. The 50-day moving average closed (by +0.70 points) above the 200-day moving average, closing above it for the sixth straight day. The directional movement indicator is positive but narrowing, and trend strength decreased. Relative strength fell to 54.31 from 54.65, the middle of a neutral range. Next resistance is 53.07; next support at 52.26.
Disclosure: I am long MS, GS, BAC, COF, BAC.