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Gary Townsend - Since 2007, a founding partner, CEO and Portfolio Manager of Hill-Townsend Capital LLC, a long/short equity financial sector fund based in Chevy Chase, Maryland. Mr. Townsend has 30 years banking, regulatory, and investment experience. He started his business career in 1978, as... More
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  • Futures Advance Smartly; Egypt Put in Perspective, but Uptrend Under Pressure 0 comments
    Jan 31, 2011 9:02 AM | about stocks: PNC, USB, SNV, MBFI
    This morning.  Equity futures are higher and improving, rebounding from Friday’s sharp selloff, its worst since last August.  Egypt appears calmer this morning. Markets appeared short-term oversold at Friday’s close. March SPX futures are at 1277.40, up +4.46 points after fair value adjustment.  Next SPX resistance is at 1290.60.  Next support is at 1261.20.
    Friday, equity markets retreated in response to civil unrest in Egypt, where protests continue this morning, and the political situation remains unresolved. Volume was higher across the board. The Nasdaq led markets lower, with a loss of -2.48%, followed by the SPX, NYSE composite, and DJI, which fell -1.79%, -1.76%, and -1.39%, respectively.  Both the SPX and DJI traded briefly above their 1,300 and 12,000 milestones in the first few minutes of the trade, but quickly turned negative, losing most of its ground by noon, but ending near the day’s low. Volatility spiked to close above 20, for the 1st time since December 1st. All indexes closed lower last week, but are higher in January. All major indexes racked up distribution days, and the market uptrend in under pressure. In the past 25 trading days, distribution number 4 on the NASDAQ and NYSE, and one on the DJI and SPX.
    Overnight, the Nikkei, Hang Seng, and Shanghai closed mixed, -1.18%, -0.72%, and +1.38%, respectively.  The Nikkei declined on industrials weakness.  On increased volume, the SHCOMP advanced for the 3rd consecutive day after closing higher last week, but closed -0.6% in January.  Volume rose +7.93%.  Last week, analysts cited a “valuation bottom” with the SHCOMP trading an P/E levels equal to levels in mid-2008.  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 slightly lower at -0.01%, -0.27%, and -0.20%, respectively.  On the EuroStoxx, financials are middling performers, up +0.03%.  News reports have French banks BNP and SocGen with the greatest exposure to Egypt. 
    LIBOR trends remain unremarkable.  Overnight USD LIBOR declined slightly to 0.23531 from 0.23563% Friday and down from 0.25188% at year-end.  USD 3-month LIBOR is 0.30438%, unchanged since last Monday, and compared to 0.30281% at year-end.  In early trading, the dollar is giving up much of Friday’s flight to quality, trading weaker against the euro and yen, but stronger against the pound.  The euro trades at US$1.3682, compared to US$1.3611 Friday and US$1.3734 the prior day.  For the 8th consecutive day, the euro closed above its 50-, 100-, and 200-day moving averages and appears overbought at these levels.  The dollar trades at ¥82.16, compared to ¥82.12 Friday and ¥82.92 the prior day.  Treasury yields are higher, with 2- and 10-year maturities yielding 0.546% and 3.341%, respectively, compared to 0.538% and 3.321% Friday.  The yield curve spread widened to +2.795% compared to +2.783% 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 mixed petroleum and natural gas, lower precious metals, but higher aluminum and copper, and mostly higher agricultural prices.
    U.S. news and economic reporting.  At 8:30, December personal income and PCE are released, followed at 9:45 by the Chicago purchasing manager index, and at 10:00 by the NAP-Milwaukee purchasing index, and the Dallas Fed manufacturing activity report.
    Overseas news.   Today, Moody’s cut its rating on Egyptian sovereign debt to Ba2 from Ba1 and reduced the outlook to negative.  Egyptian President Mubarak installed intelligence chief Omar Suleiman as his Vice President and potential successor and dissolved his cabinet.  The Irish central bank cut the country’s growth forecast for 2011, to +1.0% growth from +2.4% growth.  Spanish “Caja” savings banks will be given access to state capital in March.  In January, Euro-zone inflation rose at its fastest pace in 27 months, increasing +2.4% over the prior year and beating estimates of a +2.3% increase.
    Company news/research:
    ·         PNC – buys 19 branches from BBX in Tampa with $350 million in deposits;  PNC pays a premium for the deposits and book value for the fixed real estate assets. 
    ·         USB – buys First Community Bank (New Mexico) in an FDIC-assisted deal, acquiring all $2.1 billion in assets and $1.8 billion in deposits.  USB paid no deposit premium and received no loss sharing agreement.
    ·         SNV – downgraded to market perform at Morgan Keegan, price target reduced to $2.80 from $3.00
    ·         MBFI – raised to outperform at both FIG Partners and RW Baird, price targets of $23.60 and $26.00, respectively.
    4Q2010 Earnings.  The quarter’s first earnings results have 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.
    Friday’s equity markets.  On increased volume, equity markets ended sharply lower, ending near the intraday low and recording their largest losses since August 11th, when fears of a “second-dip” recession were taking form. For the 3rd consecutive day, the SPX and DJI attempted and failed to hold above 1300 and 12,000 respectively; combined with media reports and video of civil unrest in Egypt’s major cities, investors took profits, and none bought on weakness, in contrast to prior days.  The macro-trade returned, with a surge in commodities, the dollar, and U.S. Treasuries. The VIX rose +24.1% to end at 20.04, up from 16.15 Thursday. Earlier in the week, the VIX had broken below its 50-day and 100-day moving average, but closed Friday at its highest level since December 2, 2010.
    Equities ended lower last week, though led by the DJI, the major averages are at least +1.24% higher in January.  Friday’s trading was out of recent character, with the Egypt-driven macro-trade replacing the more fundamentals-driven trade of the past few weeks. Also, there was no buying on weakness. In addition to Egypt, there is increasing focus on how and whether the U.S. federal budget deficit, and looming debt ceiling will be timely addressed. Some trading desks have moved to a short-term cautious posture, with an expected 3-6% correction from 1300 on the SPX, to 1240. Economic reports are encouraging, including a +17.5% gain in new home sales, consumer confidence, and an upward revision in 4Q10 GDP growth. Earnings reports continue to exceed analysts’ consensus. 
    Technical indicators are more mixed. The DJI and SPX failures to move through resistance suggests that a near-term market top was reach in the past week. The 5-month long market uptrend is under pressure. All major indexes closed above their respective 200-week and 20-,50-,100-, and 200-day moving averages. Markets are in a bullish configuration, with 50-day moving averages above respective 200-day moving averages. The HILO for the week of January 21-28th, ended with 1621 new highs and 646 new lows, confirming the positive trend. The relative strength indicator closed the week at 52.26, down from 68.22 on Thursday and at the lows for the week and in the neutral range.

    All market segments closed at least -0.49% lower, but oil and gas, basic materials, and utilities performed best, while telecommunicaitons, technology, and consumer services were the worst performers, off at least -2.15%.

    Financials were middling perfomers, 
    with the XLF, BKX, and KRX down -1.74%, -1.65%, and -1.70%, respectively.  While the broader indices are have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -9.56% below its April 2010 highs and -36.5% below its best level of 82.55 in September 2008.
    NYSE Indicators.  Volume rose +26.1% to 1.323 billion shares, from 990.18 million shares Thursday, and compares to a 993.3 million share 50-day moving average.  Market breadth was negative, and up volume lagged down volume.  Advancing stocks lagged decliners by -2077 (compared to +338 Thursday), or 0.19:1.  Up volume trailed down volume by 0.12:01.
    4Q2010 Earnings.  The quarter’s first earnings results have so far exceeded EPS and revenue expectations.  Of the 183 S&P500 companies that reported earnings to date, 74% (136 of the 183) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +6.9% (versus a historical average of +2%).  EPS is up +46.7% over the prior year.  Though challenged in the current operating environment, 142 companies (78%) reported increased revenues and 134 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.
    Valuation.  The SPX trades at 13.3x estimated 2011 earnings ($95.68) and 11.8x estimated 2012 earnings ($108.50), compared to 13.6x and 12.0x respective 2011-12 earnings Friday.  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 +4.2%, 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 13.7x 2011 consensus earnings, compared to 1.52 tangible book value and 14.0x 2011 earnings Friday.  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%.  In 4Q2010, large-cap banks earned $17.92 (the sum of 31 banks’ operating EPS), compared to $16.21 in 3Q2010.  In 4Q2010, the BKX earned $2.99 per share, compared to $1.42 per share in 3Q2010. 
    SPX.  On higher volume, the SPX fell -23.20 points, or -1.79%, to 1276.34.  Volume rose +31.5% to 1.023 billion shares, from 777.72 million shares Thursday, above the 777.87 million share 50-day moving average.  For the 70th consecutive day, its 50-day moving average closed above its 200-day moving average (1247.79 versus 1155.82, respectively).  The SPX closed above its 200-week moving average (1182.43). 
    The SPX opened flat.  Initially, positive 4Q2010 U.S. GDP numbers counteracted investor uncertainty from Egypt’s political turmoil.  The index stayed above 1300 for trading’s first 25 minutes, setting the intra-day high of 1302.67 at 9:48.  End-of-the-month portfolio protection, 1300-level technical skepticism, and riots in Cairo drove a large sell-off beginning at 9:50.  The SPX crossed first resistance at 1295 by 10:20, crossed 1290 by 10:45, and crossed 1280 by 12:00.  The index lost almost all its ground during the morning’s trade.  The SPX moved sideways through the day’s end, closing just above the intra-day low of 1275.10 from 3:40.  The index closed +2.29% above its 50-day moving average, closing above that average for the 101st consecutive day, and +10.43% above its 200-day moving average.  The 20-, 50-, 100-, and 200-day moving averages rose.
    Technical indicators are mostly positive.  The SPX closed above its April highs for the 40th straight session but below 1280 for first time in 12 sessions.  The directional momentum indicator is positive marginally, with a declining trend.  Relative strength fell to 52.13 from 71.84, moving to a neutral range.  Next resistance is at 12.94.31; next support is at 1266.74. 
    BKX.  On higher volume, the KBW bank index closed at 53.29, down -0.88 points or -1.65%.  The index closed +21.94% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -9.56% below its April 23rd closing high. 
    Financials outperformed the market, and large-cap banks outperformed regionals.  The BKX index opened higher, setting the intra-day low of 553.82 at 9:48.  The sell-off in financials was more choppy.  The index turned negative at 10:25, later than the SPX,  and made an 11:00 rally off of 52.84-level support, almost retaking its break-even line.  Selling off again after 11:20, the index found lower support at 52.60.  Trading between 52.60 and 52.80 through the afternoon, the BKX broke through to the down side at 3:30, sliding through 52.50 and setting the intra-day low of 52.40 at 3:58.  The index closed above 50 for the 28th straight day.   Volume rose +97.48% to 180.74 million shares, up from 91.52 million shares Thursday, and above the 161.42 million share 50-day average.
    Technical indicators are mostly positive.  The BKX closed above its 50-, 100-, and 200-day moving averages (50.48, 48.60, and 49.02, respectively), closing above the 200-day average for the 35th straight session.  The BKX closed below its 20-day moving average (53.23) for the fourth time in five sessions.  The 20-, 50-, and 100-day averages increased while the 200-day decreased.  The 50-day moving average closed (by +1.46 points) above the 200-day moving average, closing above it for the 12th straight day.  The directional movement indicator is positive, but narrow, and trend strength is declining.  Relative strength fell to 50.01 from 56.42, the middle of a neutral range.  Next resistance is 53.36; next support at 51.93.
    Stocks: PNC, USB, SNV, MBFI
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