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Gary Townsend - Founding member and Chairman, GBT Capital Management, LLC, a macro long/short fund based in Chevy Chase, Maryland. Also, 2007-2013, a founding partner, CEO and Portfolio Manager of Hill-Townsend Capital LLC, a long/short equity financial sector fund. Mr. Townsend has 35 years... More
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GBT Capital Management LLC
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Listening to Markets
  • Futures Mixed Despite Strong Employment Report 0 comments
    Mar 4, 2011 8:53 AM | about stocks: KEY, BBT, STT, BLK, GS, C, SBNY, CMA, COF, NLY
    This morning.  U.S. equity futures are mixed after this morning’s positive employment report. World petroleum prices are higher.  Asian equity markets had a strong day. European equities are higher.  After yesterday’s gains, the SPX opens at 1330.97, its best level since February 15th. March SPX futures are at 1328.70, down -1.42 points after fair value adjustment.  Next SPX resistance is at 1338.04, but 1332 is also a key level as Wednesday's high.  Next support is at 1318.13.  The market uptrend has been under pressure since February 23rd.
     
    Thursday, spurred by positive economic news, U.S. equity indexes advanced smartly, gapping up more than +1% at the open, adding to gains throughout the day, and closing near the day’s highs. The Nasdaq, SPX, DJI, and NYSE composite rose +1.84%, +1.72%, +1.59%, and +1.52%, respectively.  Oil prices declined, the U.S. dollar weakened noticeably, and U.S. Treasury yields rose. Whereas macro-issues seemed to dominate Wednesday’s trade, investors took advantage of the prior day’s pullback to buy the obvious improvement in fundamentals.
     
    The number of distribution days is unchanged, with 5 on the Nasdaq, NYSE, and 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 after Monday’s close. 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 higher, though on lower volume.  In Asia, the Nikkei and Hang Seng closed up +1.02% and +1.24%, respectively, led by technology, and consumer goods and services. The Shanghai composite gained +1.35%, on a -21.2% decline in volume. The SHCOMP confirmed an uptrend last week, but it sustained a distribution day on Wednesday, and all  Asian equity markets experienced a steep correction after November 8th, and several recent uptrends have failed.  Asian markets have yet to establish a clear and sustainable uptrend.  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 up, with the Eurostoxx50, FTSE, and DAX rising +0.54%, +0.45%, and +0.62%, respectively.  On the EuroStoxx, financials are the 3rd best performing market segment, up +0.94%.  Sovereign debt spreads are slightly wider today. 
     
    LIBOR trends remain unremarkable.  Overnight USD LIBOR is unchanged at 22150% from the prior day and compares to 0.25188% at year-end.  USD 3-month LIBOR is unchanged at 0.30950%, compared to 0.30281% at year-end.  In early trading, the dollar is slightly stronger against the euro, pound, and yen.   The euro trades at US$1.3965, compared to US$1.3969 Thursday and US$1.3866 the prior day.  The euro trades above its 50-, 100-, and 200-day moving averages.  The dollar trades at ¥82.76, compared to ¥82.44 Thursday and ¥81.87 the prior day.  Treasury yields are higher, with 2- and 10-year maturities yielding 0.784% and 3.561%, respectively, compared to 0.760% and 3.555% Thursday.  The yield curve spread narrowed to +2.777% compared to +2.795% 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, higher precious metals, aluminum and copper, and higher agricultural prices.
     
    U.S. news and economic reporting.  Economic reporting focuses on the February employment report. Survey expects a +200K change in private payrolls and an increase in the unemployment rate to 9.1% from 9.0%. The actual gain in private payrolls was +222K. The unemployment rate fell to 8.9%. At 10:00, January factor orders is released.
     
    Overseas news.  It’s Friday, and widespread Middle East protests are expected after services. Saudi Shi’ites staged protests in two towns in the oil-producing Eastern Province, calling for the release of political prisoners.  Today, Shi’ite opposition groups in Bahrain said they were ready to negotiate with the nation’s rulers about political change.  In January, Spain’s industrial production rose +3.8% over the prior year, the fastest rate in a year.
     
    Company news/research:
     
    ·         GS – downgraded to neutral at BofA/ML – price target reduced to $174 from $182
    ·         C – downgraded to netural at BofA/ML, price target reduced to $4.95 from $5.60
    ·         SBNY – raised to buy at Jeffries, price target raised to $62 from $60
    ·         CMA – initiated at buy at SunTrust Robinson, price target of $45
    ·         COF – upgraded to overweight at Morgan Stanley, price target raised to $60 from $50
    ·         NLY – cut to hold at Stifel Nicolaus
     
    4Q2010 Earnings.  The latest quarterly earnings results have exceeded EPS and revenue expectations.  Of the 470 S&P500 companies that reported earnings to date, 71% (332 of the 470) 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 +38.0% over the prior year.  Though challenged in the current operating environment, 363 companies (77%) reported increased revenues and 310 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.    
     
    Thursday’s equity markets.  On lower volume, the major indexes posted strong gains, their best since early February, and indexes ended at their best levels since February 15th. The Nasdaq led the other indexes, ending up +1.84%; the DJI, NYSE and SPX finished up, +1.59%, +1.52%, and +01.72%, respectively.  Market gapped up more than +1% at the open, as the improvement in economic fundamentals trumped the macro concerns that weighed heavily Wednesday. Markets strengthened throughout the day. Energy prices weakened on news that Libya had shipped a million barrels of petroleum. The dollar was weak on news that European monetary authorities were inclined to boost interest rates in May. The euro strengthened.  The media ran innumerable fanciful stories on the dollar’s impending doom as a reserve currency. Treasury prices weakened. 
     
    Technical indicators improved and are generally positive. All the major indexes traded back above their 20-day moving averages.  All closed above their respective 200-week and 50-,100-,and 200-day moving averages.  Bloomberg composite highs were 284 Tuesday, but back above 10- and 20-day moving averages. The relative strength indicator rose to 60.22 from 53.01  the previous day, still in a neutral range.  The March 3rd AAII investor sentiment indicator was 36.8, compared to 36.6 on February 24th, but well off most January and early February readings.
     
    Market segments all closed higher, led by industrials, financials, and basic materials. Consumer goods, utilities, and telecommunication were the laggards, but managed to close at least +0.20% higher. 
     
    Financials were 2nd best performing market segment, led by the regional banks.  The XLF, BKX and KRX ended up +2.04%, +1.94%, and +2.24% respectively. After one day’s close below its 50-day moving average, the XLF rebounded to close +1.34% above that level yesterday. BLK was particularly strong, ending up +4.13%. KEY rose +3.32%. AXP closed up +2.98%. C added +1.78%. Among the laggards, BBT and STT rose +0.04% and +0.30%, respectively.   While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -8.47% below its April 2010 high and -35.7% below its best level of 82.55 in September 2008.
     
    NYSE Indicators.  Volume rose +4.79% to 1.074 billion shares, from 1.025 billion shares Wednesday, and 1.09x the 50-day moving average.  For the 5th time in the past 6 trading days, market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +1111 (compared to -1590 (compared to +803 Wednesday), or 4.45:1.  Up volume led down volume by 7.67:1.
     
    Valuation.  The SPX trades at 13.8x estimated 2011 earnings ($96.38) and 12.2x estimated 2012 earnings ($109.37), compared to 13.6x 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 +4.2%, 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 1.56x tangible book value and 13.0x 2011 consensus earnings, compared to 1.52 tangible book value and 12.8x 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 +27.3% and 70.6%, respectively. 
     
    SPX.  On higher volume, the SPX rose +22.53 points, or +1.72%, to 1330.97.  Volume rose +2.87% to 814.53 million shares, up from 791.77 million shares Wednesday, and above the 765.55 million share 50-day moving average.  For the 93rd consecutive day, its 50-day moving average closed above its 200-day moving average (1295.22 versus 1172.35, respectively).  The SPX closed above its 200-week moving average (1178.09). 
     
    The SPX gapped higher at the open, crossing first resistance of 1314 and the 1320-level immediately.  Developments in the Middle East, softening oil prices following a large Libyan crude shipment, and better U.S. economic data fueled equity strength.  The index rose through 1325 at 9:45 when momentum paused and the index fell back to 1323.  Buyers took a breather until 10:30, and another sustained rally took hold.  The index crossed back above 1325 at 10:45 and rose through the rest of the day.  The SPX crossed 1330 at 2:15 and continued its rally to an intra-day high of 1332.28 at 3:00.  The index traded sideways through the close and maintained the 1330-level.  The index closed +2.76% above its 50-day moving average, closing above that average for the 124th consecutive day, and +13.53% above its 200-day moving average.  The SPX closed above its 20-day moving average (1321.77).  The 20-, 50-, 100-, and 200-day moving averages rose.
     
    Technical indicators are mostly positive.  The SPX closed above 1300 for the 22nd consecutive day and above its April highs for the 63rd straight session.  The directional momentum indicator switched back to positive (its fourth change in nine sessions), and the trend is decreasing.  Relative strength rose to 58.43 from 49.24, in a neutral range.  Next resistance is at 1338.04; next support is at 1318.13. 
     
    BKX.  On higher volume, the KBW bank index closed at 53.04, up +1.01 points, or +1.94%.  Volume rose +36.8% to 145.75 million shares, up from 106.52 million shares Wednesday and above the 135.69 million share 50-day average.  The index closed +23.41% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -8.47% below its April 23rd closing high. 
     
    Financials outperformed the market, and regionals outperformed large-cap banks.  The BKX gapped higher at the open, crossing first resistance of 52.40 immediately and rallying to a +1.9% intra-day gain at 52.90 within trading’s first minutes.  The BKX crossed 53.00 at 9:50 but immediately failed at that level.  The index fell back to 52.70 by 10:10 and consolidating gains. Buyers regrouped and momentum gathered.  The index rallied from 10:30 straight through 3:00, crossing back above 53.00 at 1:15 and reaching an intra-day high of 53.15 at 3:00.  Small profit taking dipped the BKX back below 53.00 at 3:30, but the index managed to close above that level. 
     
    Technical indicators are mixed.  The index closed above 50 for the 51st straight day.  The BKX closed above its 100- and 200-day moving averages (50.35, and 48.93, respectively), closing above the 200-day average for the 58th straight session.  The index closed below its 20- and 50-day moving averages of 54.24 and 53.56, closing below them for the 8th and 4th straight days, respectively.  The 20-day moving average fell.  The positive divergence of the 50- and 100-day moving averages to the 200-day moving average continues to expand, but at a decreasing rate.  The 50-day moving average closed (by +4.64 points) above the 200-day moving average for the 34th straight session.  The 100-day moving average closed (by +1.42 points) above the 200-day moving average for the 17th straight session.  The directional movement indicator is negative and the trend is declining.  Relative strength rose to 45.87 from 37.32, a neutral range.  Next resistance is 53.44; next support at 52.34.
     


    Disclosure: I am long BBT, STT, GS, C, SBNY, CMA.
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