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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 Move Higher as Macro Concerns Abate, U.S. Economic News Remain Supportive 0 comments
    Feb 28, 2011 9:00 AM | about stocks: MCO, AIV, WFC, STI, KEY
    This morning.  U.S. equity futures are trending higher, helped by reasonably strong world equity market action in Asia and Europe. Asian equity markets closed higher on better volume.  Led by the industrials and basic materials, European equity markets are all higher.  The SPX opens at 1319.88, after Friday’s +1.06% gain on lower volume. March SPX futures are at 1324.20, up +5.52 points after fair value adjustment.  Next SPX resistance is at 1324.55.  Next support is at 1311.280.  The market uptrend has been under pressure since February 23rd.
    Friday, world equity markets rebounded, and major U.S. equity indexes closed at least +0.51% higher, led by the Nasdaq, which ended +1.58% higher. Volumes decreased across the board.  Trading desks report a reversion to recent themes: 1) buying on dips; 2) reluctant profit taking; and 3) low levels of short trading. steady market action was steady, buying on the dip, and profit taking in late afternoon when the SPX approached 1310.  Other recent themes remained in evidence:  profit taking was modest, and short positioning was limited.  Market breadth was positive, and volatility declined significantly. After two consecutive days’ close below its 20-day moving average, the SPX recaptured that level (1316.8). 
    The distribution day count is 5 on the NYSE and 5 SPX, 4 on the Nasdaq, and two on the DJI.  Distribution days infer institutional selling by tracking declines of more than -0.25% on increased volume, in the past 25 trading days.  Market uptrends come under pressure as the frequency of distribution days increases.  On the SPX, the most recent distributions were on February 23rd, 15th, and 9th.  The January 28th distribution grows stale in another 7 trading days.  The current market uptrend has persisted since last September, but came under pressure January 21st and 28th, and November 16th through December 3rd.
    World equity markets are higher, on increased volume. In Asia, the Nikkei and Hang Seng closed up +0.92% and +1.42% respectively, led by the financials and industrials.  The Shanghai composite staged another positive reversal and ended up +0.92%, led by industrials and consumer services. Financial stocks ended higher, but just +0.38% after HSBC’s earnings report disappointed. Volume rose +18.8% compared to Friday. The SHCOMP and other Asian markets experienced a steep correction after November 8th, and recent previous uptrends have failed.  Asian markets have yet to establish a clear and sustainable uptrend.  Asian markets have been under pressure in recent days. Today’s positive reversal, on increased volume, may presage a new market uptrend. In Europe, the Eurostoxx50, FTSE, and DAX are higher +0.80%, +0.04%, and +0.95%.  On the EuroStoxx, financials are middling performers, but up +0.92%.  Sovereign debt spreads are flat to slightly lower today.
    LIBOR trends remain unremarkable.  Overnight USD LIBOR was unchanged at 0.22550% and compares to 0.25188% at year-end.  USD 3-month LIBOR declined to 0.30950, compared to  0.31050% Friday and compares to 0.30281% at year-end.  In early trading, the dollar is weaker against the euro, yen, and pound.   The euro trades at US$1.3835, compared to US$1.3754 Friday and US$1.3800 the prior day.  The euro trades above its 50-, 100-, and 200-day moving averages.  The dollar trades at ¥81.88, compared to ¥81.68 Friday and ¥81.89 the prior day.  Treasury yields are higher, with 2- and 10-year maturities yielding 0.712% and 3.425%, respectively, compared to 0.712% and 3.412% Friday.  The yield curve spread widened to +2.713% compared to +2.700% 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 +2.91% on February 3, 2011.  Commodities prices are mixed, with lower petroleum and natural gas, higher precious metals, aluminum and copper, and mixed agricultural prices.
    U.S. news and economic reporting.  Today’s economic reporting focuses on January personal income and spending at 8:30; later, at 10:00, purchasing manager reports from Chicago and Milwaukee for February, and at 10:30, pending home sales for January. 
    Overseas news.  Over the weekend, China lowered its economic growth target to +7% from +8%.  Yesterday, middle east protests swept into Oman with protesters demanding political reforms.  On Friday, Ireland’s Fine Gael party fell short of an outright majority.  Moody’s says that Spain’s banks could fall short of the government’s new capital requirements by as much as €50 billion, up from the prior €17 billion estimate. 
    Company news/research:
    ·         RF – following management meeting, Deutsche Bank thinks the company is an unlikely seller, maintains hold rating and $7 price target.
    ·         BAC – an investor group including PIMCO doubled the number securitizations it wants BAC to repurchase. 
    4Q2010 Earnings.  The latest quarterly earnings results have so far exceeded EPS and revenue expectations.  Of the 457 S&P500 companies that reported earnings to date, 71% (324 of the 457) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +5.8% (versus a historical average of +2%).  EPS is up +38.2% over the prior year.  Though challenged in the current operating environment, 352 companies (77%) reported increased revenues and 304 companies (67%) beat revenue estimates.  In the fourth quarter of 2010, the SPX earned $22.47 per share, a +4.9% and +28.3% increase over 3Q10 and 4Q09 EPS of $21.42 and $17.51, respectively.
    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.  In the fourth quarter of 2010, the BKX earned $0.93 per share, a +31.0% increase over 3Q10 EPS of $0.71, and compared to 4Q09 EPS of -$0.52.    
    Friday’s equity markets. On lighter volume, the major indexes recovered some of their losses from earlier in the week. Nasdaq led the other indexes, closing up +1.58%, compared to the NYA, SPX, and DJI, which ended up +1.23%, +1.06%, and 0.51%, respectively.  Trading desks cited greater optimism that the Libyan situation would resolve within a few days without greater disruption than already exists as well as statements from Saudi Arabia and the IEA (International Energy Agency) that OPEC members would make up any deficit. Friday’s economic news was mixed, with a lower revision to U.S. 4Q2011 GDP, but a boost in the University of Michigan Confidence number to 77.5, its best reading since January 2008.
    For the week, stocks fell, with the DJI off -2.1%, and the SPX, NYSE, and Nasdaq all off at least -1.5%.  The recent buying on dips was largely Tuesday and Wednesday, but made a stronger appearance on the final two trading days, especially on Thursday’s positive reversal. Trading desks reported most of the selling pressure came from large vanilla sellers taking profits. Short sellers active early in the week, but largely absent Thursday and Friday.
    Fund flows into domestic equities remained positive, with the ICI reporting inflows of $5.18 billion for the week ended February 16th.  Combined with prior week, the total $10.1 billion inflows were the best since May-June 2009.
    Technical indicators are mixed. While all indexes were lower on the week, and all the major indices broke through their 20-day moving averages, only the Nasdaq broke through its 50-day moving average on Wednesday and then again on Thursday, but rebounded and ended well above that level.  On Thursday, the SPX broke through sentimental support at 1300, but the SPX never threatened its 50-day moving average at 1289.  The major indexes closed above their respective 200-week, 50-, 100-, and 200-day moving averages. The markets are in a bullish configuration, with the 50-day moving averages above their respective 200-day averages.  NYSE 52-week net highs were +52, below its 10-day moving average of 213.70. The relative strength indicator closed the week at 57.46, up from Thursday’s close of 50.27, and in a neutral range.
    All market segments closed higher with financials, basic materials and technology up +1.42%, +1.41% and +1.34% respectively.  Consumer goods, utilities, and health care were the laggards.
    Financials were higher on the day, with MCO and AIV leading the way up +4.97% and +4.04%.  Banks were mostly positive, led by gains in super-regional banks like WFC, STI and KEY. The underperforming banks were BBT and COF, off -0.14% and -1.26%, respectively. The KRX led the indices higher, up +2.26%. The XLF and BKX were both up +1.4%.  While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -7.58% below its April 2010 highs and -35.1% below its best level of 82.55 in September 2008.
    NYSE Indicators.  Volume fell -0.22% to 955.10 million shares, from 1.221 billion shares Thursday, and 0.96x the 50-day moving average.  For the 2nd consecutive day, market breadth was positive, and for the first time last week, up volume also exceeded down volume.  Advancing stocks led decliners by +1843 (compared to +143 Thursday), or 3.98:1.  Up volume trailed down volume by 6.15:1.
    Valuation.  The SPX trades at 13.6x estimated 2011 earnings ($96.28) and 12.0x estimated 2012 earnings ($109.27), 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 +4.1%, and +5.0%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($83.87) by +14.8% and +30.3%, respectively.
    Large-cap banks trade at a median 1.58x tangible book value and 13.5x 2011 consensus earnings, compared to 1.56 tangible book value and 13.3x 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 and 2012 BKX earnings to exceed 2010 operating earnings by +27.1% and 70.6%, respectively. 
    SPX.  On lower volume, the SPX rose +13.78 points, or +1.06%, to 1319.88.  Volume fell -21.9% to 718.32 million shares, down from 919.51 million shares Thursday, and above the 776.06 million share 50-day moving average.  For the 89th consecutive day, its 50-day moving average closed above its 200-day moving average (1289.14 versus 1168.73, respectively).  The SPX closed above its 200-week moving average (1179.57). 
    The SPX gapped higher at the open, crossing first resistance of 1313 at 9:45.  The index rallied to 1318 by 10:00 and traded sideways through 11:20.  A small sell-off retraced gains to 1314-level at 11:45.  Buyers bought the dip, and rallied the index to an intra-day high of 1320.61 at 2:20.  The index traded sideways through the close, but finished just below the 1320 level.  The index closed +2.38% above its 50-day moving average, closing above that average for the 120th consecutive day, and +12.93% above its 200-day moving average.  The SPX closed below its 20-day moving average (1316.82) for the second consecutive day.  The 20-, 50-, 100-, and 200-day moving averages rose.
    Technical indicators are mixed.  The SPX closed above 1300 for the 18th consecutive day and above its April highs for the 59th straight session.  The directional momentum indicator is negative, and the trend is decreasing.  Relative strength rose to 55.67 from 48.77, a neutral range.  Next resistance is at 1324.55; next support is at 1311.28. 
    BKX.  On lower volume, the KBW bank index closed at 53.56, up +0.74 points, or +1.40%.  Volume fell -20.1% to 121.14 million shares, down from 152.54 million shares Thursday and below  the 138.57 million share 50-day average.  The index closed +24.62% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -7.58% below its April 23rd closing high. 
    Financials were the market’s best performer, and regionals outperformed large-cap banks.  The BKX gapped higher at the open, crossing first resistance at 53.27 immediately.  The index rallied to an intra-day high of 53.75 at 10:05, up +1.7% intra-day.  Financials traded sideways through 11:25, when a sell-off dropped the BKX to 53.40.  Buyers rallied the index again, but to a lower level, and the index hit resistance at 53.70 between 1:15 and 2:30.   The BKX lost some momentum after 2:30 and fell back to 53.40 by 3:35.  Financials managed a small rally into the closing bell and finished above 53.50.
    Technical indicators are mixed.  The index closed above 50 for the 47th straight day.  The BKX closed above its 50-, 100-, and 200-day moving averages (53.37, 50.14, and 48.92, respectively), closing above the 200-day average for the 54th straight session and retaking the 50-day moving average.  The index closed below its 20-day moving average of 54.48 for the 4th straight day.  The 200-day moving average fell.  The positive divergence of the 50- and 100-day moving averages to the 200-day moving average continues to expand.  The 50-day moving average closed (by +4.45 points) above the 200-day moving average for the 30th straight day.  The 100-day moving average closed (by +1.23 points) above the 200-day moving average for the 13th straight day.  The directional movement indicator is negative and the trend is decreasing.  Relative strength rose to 47.03 from 40.59, a neutral range.  Next resistance is 53.93; next support at 53.00.

    Disclosure: I am long WFC.
    Stocks: MCO, AIV, WFC, STI, KEY
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