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Futures Advance After GDP Revision Shows Best Final Sales Since 1984

|Includes:BPFH, Morgan Stanley (MS), SNV
This morning.  Equity futures are slightly higher after the 8:30 release of revised 4Q10 U.S. GDP, now at +3.2% compared to prior +2.6%, but below survey at 3.5%. Despite the lower than survey revision, final sales were at their best levels since 1984. Given the implied inventory drawdown, future economic activity will have to accelerate, and futures rebounded after weakness immediately after the release. Earlier morning weakness in the futures might be attributable to social unrest in Egypt. Comments coming out of Davos’ “World Economic Forum” have been generally upbeat. This morning, BAC’s Brian Moynihan stated, “the credit issue is behind the company and behind the U.S.”  Equity markets open this morning with the DJI, SPX, and NYSE composite at fresh multiyear highs. March SPX futures are at 1297.70, up +1.61 points after fair value adjustment.  Next SPX resistance is at 1300.26.  Next support is at 1292.49.
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Yesterday, equity markets ignored a barge load of mixed and negative news, and after an afternoon’s consolidation, traded higher into the close. Volumes declined. For the 2nd straight day, the Nasdaq led with a +0.58% gain, followed by the SPX, NYSE composite, and DJI, which rose +0.22%, +0.16%, and +0.04%, respectively. Both the SPX and DJI traded above their 1,300 and 12,000 milestones intraday, but lost ground in the day’s final minutes to close below those levels. At the close, the DJI, SPX, and NYSE composite recorded fresh multi-year highs. The Nasdaq closed -0.38% below its January 18th high. Markets are in a confirmed uptrend.  Distribution days number 3 on the NASDAQ and NYSE.  The DJI and SPX have no distribution days in the past 25 trading days.
Overnight, the Nikkei, Hang Seng, and Shanghai closed mixed, +1.13%, -0.68%, and +0.13%, respectively.  The Nikkei declined on industrials weakness. The SHCOMP advanced for the 2nd consecutive day and closed higher on the week, but it remains too early to call an end to its correction, which commenced in early November. Volume declined -20.4%. Analysts cited a “valuation bottom” with the SHCOMP trading an P/E levels equal to levels in mid-2008, during the financial crisis. Further monetary tightening is expected, though recent new property taxes and down payment requirements remove most short-term policy uncertainty. In Europe, the Eurostoxx50, FTSE, and DAX are mixed at +0.32%, -0.82%, and +0.21%, respectively.  On the EuroStoxx, financials are the best performing market segment, up +1.53%. Investors cite an improving “tone” in investor confidence that Eurozone sovereign debt issues are manageable and that economic growth will resume. One report has January retail sales at their best level in the past 4 years.
LIBOR trends remain unremarkable.  Overnight USD LIBOR is 0.23563%, unchanged from Thursday and down from 0.25188% at year-end.  USD 3-month LIBOR is 0.30438%, unchanged since Monday, and compared to 0.30281% at year-end.  In early trading, the dollar is slightly stronger against the euro, but weaker against the pound and yen.  The euro trades at US$1.3727, compared to US$1.3734 Thursday and US$1.3713 the prior day.  For the 7th consecutive day, the euro closed above its 50-, 100-, and 200-day moving averages and appears overbought at these levels.  The dollar trades at ¥82.26, compared to ¥82.92 Thursday and ¥82.17 the prior day.  Treasury yields are higher, with 2- and 10-year maturities yielding 0.594% and 3.409%, respectively, compared to 0.578% and 3.387% Thursday.  The yield curve spread widened to +2.815% compared to +2.809% 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, mixed precious metals, but higher aluminum and copper, and mostly lower agricultural prices.
U.S. news.  At 8:30, U.S. 4Q10 GDP was revised to +3.2% from +2.6%, but below survey of +3.5%. The final sales figures, which accounts for all but inventories, grew at a +7.1%, the highest since 1984, indicating that inventory drawdowns contributed significantly to the lower than survey revision.
Overseas news.   Today, Egypt detained opposition leader and Nobel Laureate Mohamed ElBaradei in advance of massive planned protests.  In January, Euro-zone retail sales rose at the fastest pace since May of 2006. 
Company news/research:
·         BPFH – reports 4Q10 EPS of -$0.14 compared to estimates of -$0.02.
·         SNV – reports 4Q10 EPS of -$0.23 compared to estimates of -$0.20.
·         Financials raised to overweight at Brown Brothers Harriman
4Q2010 Earnings.  The quarter’s first earnings results have so far exceeded EPS and revenue expectations.  Of the 176 S&P500 companies that reported earnings to date, 75% (132 of the 176) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +7.9% (versus a historical average of +2%).  EPS is up +49.23% over the prior year.  Though challenged in the current operating environment, 136 companies (78%) reported increased revenues and 130 companies (74%) beat revenue estimates. 
With all 24 BKX members reporting, 75% (18 out of 24) beat operating EPS estimates.  Bank revenues disappointed slightly, missing estimates by -0.59% on average.  Fifteen banks (63%) reported increased revenues over the prior year’s quarter and 17 banks (71%) beat revenue estimates.
Thursday’s equity markets.  Led by the Nasdaq, the major averages ended higher, but volume was lower across the board. At the open, the indexes moved up, retraced their gains through midday and then spent the afternoon consolidating, until Microsoft’s (NYSE:MS) earnings were mistakenly released, spurring a late advance just before the close. The SPX extended its streak to 5 days, closing just below the 1300 level. The Dow hit an intraday high of 12019.53, but failed to close above the 12000 level.  Financial, industrials and healthcare stocks led the gains, while retailers and basic materials were lower and the day’s worst performers. Early weakness in bonds reversed and buyers drove intraday yields down from their highs of 3.46% after the successful auction of 7 year notes at about 1 pm.
Technical indicators are generally positive.  Markets are in a confirmed uptrend that began in early September, which after consolidating in November, have extended over the last several weeks.  Still, markets continue to encounter strong resistance, and upward moves have recently been of the “melt-up” variety. The major themes remain: 1) hawkish comments or actions from monetary authorities in all but the United States; 2) commodities weakness; 3) rotation toward high cap names; 4) reassertion of the fundamental trade, and abatement of the macro-trade; 4) the BRICs grow cold, as capital flows toward Europe and the United States.  Trading desks report that despite valuations that seem overbought short-term, that there’s little investor appetite to the short-side and an inclination to buy on weakness. 
All of the major indices closed above their respective 200-week and 20-, 50-, 100-, and 200-day averages. Markets remain in a bullish configuration, with the 50-day moving average above their respective 200-day moving averages.  The VIX closed down -2.94% to 16.15, from 16.64 at the prior day’s close. The relative strength indicator for the New York Composite Index closed at 68.22, up from the prior 67.35 close and near the top of a neutral range.
Financial stocks closed higher, with the XLF, BKX, and KRX +0.88%, +1.02%, and +0.63%, respectively.  While the broader indices are at multi-year highs and have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -8.04% below its April 2010 highs and -35.5% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume declined -8.955 to 990.18 million shares, from +1.088 billion shares Wednesday, and compares to a 994.0 million share 50-day moving average.  Market breadth was positive, and up volume exceeded down volume.  Advancing stocks led decliners by +338 (compared to +1161 Wednesday), or 1.25:1.  Up volume led down volume by 1.52:01.
Valuation.  The SPX trades at 13.6x estimated 2011 earnings ($95.69) and 12.0x estimated 2012 earnings ($108.50), compared to 13.5x 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 +3.5%, and +4.2%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +19.4% and +35.4%, respectively.
Large-cap banks trade at a median 1.52x tangible book value and 14.1x 2011 consensus earnings, compared to 1.52 tangible book value and 11.1x 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 +35.1%.  Analysts’ estimates for bank 4Q2010 earnings are 19.6% 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.
SPX.  On lower volume, the SPX rose +2.91 points, or +0.22% to 1299.54, setting a new two-year high.  Volume fell -6.57% to 777.72 million shares from 832.40 million shares Wednesday, below the 778.51 million share 50-day moving average.  For the 69th consecutive day, its 50-day moving average closed above its 200-day moving average (1245.83 versus 1155.50, respectively).  The SPX closed above its 200-week moving average (1182.55). 
The SPX opened flat.  The index made two failed rally attempts to the 1300 level, a resistance point, by 10:30.  Selling pressure took over at 11:00, and the index dropped to its intra-day low of 1294.41 at 11:34.  Buyers again stepped in on the dip and rallied the tape back to 1299 by 1:00.  The SPX traded sideways until a 3:30 rally sent the index above 1300 for 12 minutes, setting the intra-day high of 1301.29 at 3:46.  A closing bell sell-off pushed the index just below 1300, where it closed.  The index closed +4.31% above its 50-day moving average, closing above that average for the 101st consecutive day, and +12.47% above its 200-day moving average.  The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are positive.  The SPX set a new two-year high, closing above its April highs for the 39th straight session and above 1280 for the 11th straight session.  The directional momentum indicator is positive, with a stable trend.  Relative strength rose to 71.84 from 70.55, an overbought range.  Next resistance is at 1302.42; next support is at 1295.54. 
BKX.  On lower volume, the KBW bank index closed at 53.29, up +0.54 points or +1.02%.  The index closed +23.99% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -8.04% below its April 23rd closing high. 
Financials were the market’s best sector, and large-cap banks outperformed regionals.  Like broader markets, the BKX index opened slightly lower, setting the intra-day low of 53.63 at 9:31.  A 9:45 rally failed at 53.07, a resistance point.  The BKX’s retreat from the rally was shallow and support held at the 52.90 level, in positive territory.  On the ensuing 10:30 rally, banks surged past resistance to breach the 53.10 level.  While broader markets then declined into negative territory and an intra-day low on the 11:00 sell-off, banks sold off modestly, retaining some gains.  The BKX rallied again at 11:30 and breached 53.20 just after 12:00.  Trading in a narrow 52.10-52.20 range through the afternoon, bank stocks finally broke higher at 3:00 and rallied through the closing bell to finish at the day’s highs.  The index closed above 50 for the 27th straight day.   Volume fell -29.4% to 91.52 million shares, down from 129.62 million shares Wednesday, and below the 161.85 million share 50-day average.
Technical indicators are mostly positive.  The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (53.22, 50.36, 48.53, and 49.04, respectively), closing above the 200-day average for the 34th straight session and moving back above the 20-day average.  The 20-, 50-, and 100-day averages increased while the 200-day decreased.  The 50-day moving average closed (by +1.32 points) above the 200-day moving average, closing above it for the 11th straight day.  The directional movement indicator is positive, but narrow, and trend strength is declining.  Relative strength rose to 56.42 from 52.98, the middle of a neutral range.  Next resistance is 53.52; next support at 52.84.

Disclosure: I am long SNV.
Stocks: MS, BPFH, SNV