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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 Flat as Macro-concerns Trump Positive Economic Signals 0 comments
    Mar 2, 2011 9:23 AM | about stocks: BK, AIV, HCBK, HST, KIM, FITB, HBAN, COF
    This morning.  Despite continued positive economic news, U.S. equity futures are modestly lower, suggesting that macro-concerns continue to rule world equity markets, at least for a time. Asian equity markets ended lower, though on lower volume.  European equities are lower, though petroleum prices are less volatile in today’s trade. After Tuesday’s -1.57% loss, the SPX opens at 1306.33.  March SPX futures are at 1303.20, down -2.23 points after fair value adjustment.  Next SPX resistance is at 1323.57.  Next support is at 1397.62.  The market uptrend has been under pressure since February 23rd.
    Tuesday, U.S. equity indexes closed at least -1.38% lower, but volume fell on all indexes save the Nasdaq, which recorded another distribution day. The Nasdaq, SPX, DJI, and NYXE composite ended  off -1.61%, -1.57%, -1.38%, and -1.45%, respectively. The declines came despite robust and favorable economic news (strong SPX earnings, better than expected PMI and ISM last Friday and Monday, budgetary progress reported yesterday) and despite reasonable and improving market valuations.  If the macro-trade has reasserted itself, the factors cited in yesterday’s trading include Bernanke’s testimony before the Senate Finance Committee (his innocuous remark that higher oil prices are harmful to the economy was broadly cited in the media), continued baseless speculations regarding Middle East developments, and a resurgent pessimism, which carried market volatility back above 21. Relative strength is in a neutral range.
    Distribution days rose to 5 on the Nasdaq, which ended -1.61% lower on increased volume; otherwise, the distribution day count remained unchanged at 5 on the NYSE and 5 SPX, 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 5 trading days.  The current market uptrend has persisted since last September, but also came under pressure January 21st and 28th, and November 16th through December 3rd.
    World equity markets are lower, on mixed volume.  In Asia, the Nikkei and Hang Seng closed down -2.43% and -1.49%, respectively, led by industrials, basic materials, and consumer goods, apparently on global growth concerns. The Shanghai composite ended only -0.18% lower, on lower volume, in a mixed trade led by telecommunications, financials, and health care.  Volume fell -5.83%% compared to Tuesday.  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.  Friday, the SHCOMP began a new market uptrend, when its staged a positive reversal on increased volume, followed by Monday’s confirmation on a positive trade.  That said, Chinese monetary policy seems likely to tighten further, and in recent weeks, several new uptrends failed after a few trading days.  In Europe, equity indexes are off their worst levels of the day, but all are lower with the Eurostoxx50, FTSE, and DAX are down -0.99%, -0.62%, and -0.86%, respectively. On the EuroStoxx, financials are the 8th worst performing market segment, down -1.24%.  Sovereign debt spreads are flat to slightly lower today. 
    LIBOR trends remain unremarkable.  Overnight USD LIBOR declined to 0.22350% from +0.22550% the prior day and compares to 0.25188% at year-end.  USD 3-month LIBOR was unchanged at 0.30950%, compared to 0.30281% at year-end.  In early trading, the dollar is mixed, weaker against the euro and pound, but stronger against the yen.   The euro trades at US$1.3812, compared to US$1.3777 Tuesday and US$1.3806 the prior day.  The euro trades above its 50-, 100-, and 200-day moving averages.  The dollar trades at ¥82.02, compared to ¥81.86 Monday and ¥81.78 the prior day.  Treasury yields are higher, with 2- and 10-year maturities yielding 0.665% and 3.429%, respectively, compared to 0.641% and 3.392% Tuesday.  The yield curve spread widened to +2.764% compared to +2.751% 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 generally higher, with higher petroleum but lower natural gas, mixed precious metals, aluminum and copper, and generally higher agricultural prices.
    U.S. news and economic reporting.  Economic reporting turns to February employment with the release of the ADP employment change report, which reported private sector employment gains of +217K, much better than survey +180K. Bernanke returns to Capitol Hill to complete his Humphrey-Hawkins testimony in front of the House Banking Committee.
    Overseas news.  In February, Spanish jobless claims rose by +1.6%.  In Libya, opposition forces may ask for U.N. airstrikes on the regime’s military installations to avoid the appearance of an “invasion” by any one foreign country.
    Company news/research:
    ·         Swiss Re – estimates total insurance industry losses from the New Zealand earthquake at -$12 billion, or one-third of the -$36 billion in total 2010 industry-wide catastrophe losses. 
    ·         BK – 10-K filing discloses that a +100 point increase on the SPX will add +$0.05-$0.06 to EPS (the SPX is up +50 points QTD).
    4Q2010 Earnings.  The latest quarterly earnings results have so far exceeded EPS and revenue expectations.  Of the 466 S&P500 companies that reported earnings to date, 70% (327 of the 466) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +5.7% (versus a historical average of +2%).  EPS is up +38.1% over the prior year.  Though challenged in the current operating environment, 360 companies (77%) reported increased revenues and 307 companies (66%) 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.    
    Tuesday’s equity markets.  Except on the Nasdaq, volumes were lower on the major indexes, but all sold off steadily throughout the day and closed near their session lows.  The Nasdaq led the way, off -1.61%, and tested its 50-day moving average of 2731.57 before settling slightly higher.  The DJI, SPX, and NYSE were off -1.38%, -1.57%, and -1.45%.   Investors focused on macro issues in Middle East, where unrest has stimulated baseless and other speculations of events that haven’t yet occurred but that could lead to higher oil prices and an end to the worldwide economic recovery.  Essentially, the discussion has returned to November’s monologue. Positive data about the economy from the Institute for Supply Management (ISM), an index reading of 61.4 the highest since May 2004, indicating that factories added workers and  boosted production in February was not enough to turn the market.  Tuesday’s down session marks the first to start a new month since July 1, 2010.  
    Technical indicators were more negative. The Nasdaq tested its 50-day moving average, while the DJ Transportation average broke through last week’s lows and closed down -2.52%. The VIX closed at 21.01, up +14.5% from Monday’s close.  All of the major averages closed below their 20-day moving average, but above their 200-week and 50-, 100-, and 200-day moving averages.  The one-day delayed NYSE new 52-week net highs rose to +242.00, above its 10-day moving average of 203.90. The relative strength indicator closed at 51.53 versus 61.07 for Monday, and at the low end of the neutral range.
    All market segments closed lower with health care, consumer goods, and utilities the best performers, while financials, basic materials, and industrials were the worst.
    Financials were lower, led by a diverse group of names.  The XLF, BKX, and KRX fell -2.14%, -2.28% and -1.46% respectively.  AIV, HCBK, HST, and KIM were all off at least -4.5%, leading the decline. After disclosure of a SEC investigation, FITB fell -4.42%. The SEC will investigate commercial loan accounting and reporting.  Among regional banks, HBAN and COF were also off -3.00%.  While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -9.93% below its April 2010 highs and -36.77% below its best level of 82.55 in September 2008.
    NYSE Indicators.  Volume declined -5.60% to 1.187 billion shares, compared to 1.257 billion shares Monday, and 1.19x the 50-day moving average.  For the 1st time in the past 4 trading days, market breadth was negative, and up volume trailed down volume.  Advancing stocks lagged decliners by -1590 (compared to +1091 Monday), or 0.32:1.  Up volume trailed down volume by 0.12:1.
    Valuation.  The SPX trades at 13.6x estimated 2011 earnings ($96.28) and 11.9x estimated 2012 earnings ($109.37), compared to 13.8x and 12.1x 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 +4.1%, and +5.1%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($83.87) by +14.9% and +30.4%, respectively.
    Large-cap banks trade at a median 1.52x tangible book value and 12.8x 2011 consensus earnings, compared to 1.54 tangible book value and 13.3x 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 and 2012 BKX earnings to exceed 2010 operating earnings by +27.1% and 70.6%, respectively. 
    SPX.  On lower volume, the SPX fell -20.89 points, or -1.57%, to 1306.33.  Volume fell -4.41% to 908.97 million shares, down from 950.89 million shares Monday, but above the 780.25 million share 50-day moving average.  For the 91st consecutive day, its 50-day moving average closed above its 200-day moving average (1292.25 versus 1170.44, respectively).  The SPX closed above its 200-week moving average (1178.58). 
    The SPX opened higher, but with negative momentum.  The intra-day high of 1332.09 came at 9:33.  Equities began a steady descent from there, turning negative at 10:10 and reaching first support at 1320 by 10:30.  A small rally off of 1320-support lifted the index back to 1325 by 11:00, but momentum faded and the index fell through 1320 and to 1315 by noon.  Sentiment degraded further through the afternoon.  The index breached 1310 at 2:15, reached 1307 at 3:15, and traded sideways for the remainder of the session.  A small sell-off in trading’s final minutes left the SPX closing at its intra-day low.  The index closed +1.09% above its 50-day moving average, closing above that average for the 122nd consecutive day, and +11.61% above its 200-day moving average.  The SPX closed below its 20-day moving average (1320.38) for the fourth consecutive day.  The 20-, 50-, 100-, and 200-day moving averages rose.
    Technical indicators are mixed.  The SPX closed above 1300 for the 20th consecutive day and above its April highs for the 61st straight session.  The directional momentum indicator switched back to negative, and the trend is decreasing.  Relative strength fell to 48.25 from 58.84, a neutral range.  Next resistance is at 1323.57; next support is at 1297.62. 
    BKX.  On higher volume, the KBW bank index closed at 52.19, down -1.22 points, or -2.28%.  Volume rose +4.6% to 153.80 million shares, up from 147.02 million shares Monday and above the 134.88 million share 50-day average.  The index closed +21.43% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -9.94% below its April 23rd closing high. 
    Financials underperformed the market, and large-cap banks underperformed regionals.  The BKX opened lower and set its intra-day high at the open.  Financials fell steadily through 10:15, breaching first resistance at 53.08 by 9:45 and reaching 52.50 at 10:15.  Buying returned, and the BKX rallied to 53.00 at 11:00.  Momentum faded quickly, and the index retraced to 52.50 by noon.  The index traded sideways through 1:25 when a brief but sharp sell-off took the BKX down to 52.40.  The index crossed 52.30 to the downside at 2:35.  A small rally returned the index to 52.50 at 2:50, but financials could not hold that level and fell into the close, setting the intra-day low at the closing bell. 
    Technical indicators are mixed.  The index closed above 50 for the 49th straight day.  The BKX closed above its 100- and 200-day moving averages (50.25, and 48.91, respectively), closing above the 200-day average for the 56th straight session.  The index closed below its 20- and 50-day moving averages of 54.39 and 53.49, closing below them for the 6th and 2nd straight days, respectively.  The 20- and 200-day moving averages 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 +4.58 points) above the 200-day moving average for the 32nd straight session.  The 100-day moving average closed (by +1.33 points) above the 200-day moving average for the 15th straight session.  The directional movement indicator is negative and the trend is decreasing.  Relative strength fell to 38.20 from 45.95, the lower end of a neutral range.  Next resistance is 53.03; next support at 51.75.

    Disclosure: I am long HBAN.
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