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Gary Townsend - Founding partner 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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  • In a Sea of Troubles, Markets Trade Lower  0 comments
    Mar 15, 2011 8:55 AM | about stocks: COF, DFS, GNW, AFL, PRU, NYX, NDAQ, HBAN, CMA, RF
    This morning.  World equity markets are substantially lower this morning, led by markets in Japan, where the Nikkei closed off -10.6%. Trading desks report some “panic-selling”, as reflected in a substantial increase in volatility in both equity and commodities markets, though this has reportedly abated somewhat in subsequent trading. European markets are down more than -2.5%.  After a fair value adjustment of +0.79 points, June SPX equity futures are off -2.6%, or -32.6 points, well below support levels. In addition to equities weakness, commodity prices are lower, as markets continue to focus on new developments in Japan, as events at its multi-reactor Fukushima Daiichi nuclear complex remain uncontrolled and its effects unpredictable. An uncontained nuclear event suggests the near-permanent loss of productive assets in Japan’s northeast, and a corresponding reduction in Japan’s potential GDP. In the U.S., the FOMC also meets today and reports this afternoon at 2:15. In the Middle East, Iran has criticized Saudi Arabia’s military intervention in Bahrain. Gadhafi continues to progress in his civil war. 

    The SPX opens at 1296.39, -3.47% below its February 18th post-Lehman high.  March SPX futures are at 1256.40, down -34.09 points after fair value adjustment.  Next SPX resistance is at 1302.93.  First support is at 1288.11, followed at 1280 and 1265.
     
    Monday, equity markets closed lower on mixed volume, but also well off the intraday lows. News of a nuclear containment failure and fire at a fourth nuclear plant at Fukushima (the fire, in a spent-fuel containment pool, reportedly extinguished) came after yesterday’s close, but heightened the markets’ reaction and volatility today. Market breadth was negative. Volatility rose, but declined through the afternoon. The U.S. dollar weakened.  U.S. Treasury yields were largely unchanged. U.S. equity markets are in correction.  Market corrections typically end on an intraday reversal on increased volume, when confirmed in subsequent trading.
     
    World equity markets are much lower, led by the Nikkei’s decline. In China, the Hang Seng and Shanghai composite closed -2.86% and -1.41%, respectively. On the SHCOMP, volume rose +32.7%. After today’s distribution, the SHCOMP’s uptrend is under pressure. In Europe, equity indexes are much lower, but off intraday lows.  The Eurostoxx50, FTSE, and DAX are down -3.33%, -2.23%, and -4.00%, respectively.  On the EuroStoxx, financials are the 7th worst performing market segment, down -3.51%.
     
    LIBOR trends remain unremarkable.  Overnight USD LIBOR is lower at 0.21150%, compared to 0.21350% Monday and 0.25188% at year-end.  USD 3-month LIBOR is unchanged at 0.30900%and compares to 0.30950% at year-end.  In early trading, the dollar is stronger against the euro and pound, but weaker against the yen.  The dollar has trended lower since last June and now trades well below its 50-, 100-, and 200-day moving averages.  The euro trades at US$1.3878, compared to US$1.3992 Monday and US$1.3903 the prior day.  The euro trades above its 50-, 100-, and 200-day moving averages.  The dollar trades at ¥81.34, compared to ¥81.63 Monday, and compares to ¥81.84 the prior day.  Treasury yields are lower, with 2- and 10-year maturities yielding 0.529% and 3.261, respectively, compared to 0.593% and 3.356% Monday. The yield curve spread narrowed to +2.732% compared to +2.763% 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 +2.889% on February 3, 2011.  Commodities prices are also lower, with lower petroleum, but slightly higher natural gas, lower precious metals, higher aluminum and lower copper, and lower agricultural prices.
     
    U.S. news and economic reporting.  At 8:30, economic reporting begins with March Empire manufacturing, import prices, TIC flows; at 2:15, the FOMC releases its rate decision.
     
    Overseas news.  The nuclear crisis in Japan worsened as multiple explosions at the Fukushima Daiichi plant exposed one reactor’s uranium core while a spent-fuel containment pool at another reactor caught fire.  That fire was reportedly extinguished, but only after the environmental release of radioactive materials of unknown specie. Overnight, the Bank of Japan injected $100 billion into the markets.  Iran criticized Saudi Arabia’s military deployment into Bahrain to help maintain security as “unacceptable.”  Spain sold €4.5 billion in 12- and 18-month bills at lower yields and higher demand than the prior auction.  
     
    Company news/research:
     
    ·         COF – reports February Master Trust data: net charge-offs fell to 5.91% from 6.79% in January; delinquencies fell to 3.83% from 4.00%.  
    ·         DFS – reports February Master Trust data: net charge-offs rose to 5.79% from 5.75% in January; delinquencies fell to 3.70% from 3.84%.
    ·         House and Senate lawmakers will introduce legislation today to delay the Durbin amendment’s debit card fee regulations. 
     
    4Q2010 Earnings.  The latest quarterly earnings results have exceeded EPS and revenue expectations.  Of the 476 S&P500 companies that reported earnings to date, 71% (338 of the 476) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +5.3% (versus a historical average of +2%).  EPS is up +37.1% over the prior year.  Though challenged in the current operating environment, 366 companies (77%) reported increased revenues and 312 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.    
     
    Monday’s equity markets.  On mixed volume, the major indexes closed lower, but well off their intraday lows. The DJI, Nasdaq, NYSE composite, and SPX ended down -0.43%, -0.54%, -0.66%, and -0.60%, respectively.  News of the Fukushima-Daiichi nuclear containment failure came after the close. U.S. markets opened lower, but found support mid-day, as buying picked up in response to attractive valuations and doubts regarding the reach of events in Japan. In the Middle East, reports that Gulf Cooperation Council (Saudi) troops had entered Bahrain added to the morning’s volatility. Oil closed at $101.46, up +0.30%.  Intraday, the VIX rose to 22.74, but closed at 21.13, up +5.23%, beneath the critical 22 level.
     
    Technical Indicators were generally negative. The SPX opened at its intraday 1301.19 high, and proceeded to a mid-day low of 1286.37, after which it rallied to close at 1296.39, above the 1294 support level.  All the major indexes closed beneath their 20- and 50-day moving averages, but remain above their 200-week and 100- and 200-day moving average. The Bloomberg NYSE new net highs were +7 versus Friday’s close of -10. The relative strength indicator closed at 43.27, down from Friday’s close of 46.11 and near the low end of a neutral range.
     
    Market segments were mostly negative. Oil and gas and basic materials were the only segments that closed higher, up +0.37% and +0.23%, respectively. Utilities, telecommunications, and consumer services led the laggards, each down over -1.0%.
     
    Financials were down across the board, with insurers leading the way. The names that lost the most ground were GNW, AFL and PRU, all down ~3%.  Also lower was NDAQ, ending -3.02% lower after speculation arose that it may bid for the NYSE Euronext (NYX).  Regional banks were lower, led by CMA, RF, and HBAN, which closed down -2.15%, -1.34%, and -1.33% respectively. The BKX, KRX and XLF were all lower, down -0.82%, -0.98%, and -0.91%, and are below their 20- and 50-day moving averages, but above their 100- and 200-day moving average. While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -10.1% below its April 2010 high and -36.9% below its best level of 82.55 in September 2008.
     
    NYSE Indicators.  Volume rose +4.77% to 963.83 million shares, from 919.9 million shares Friday, 0.93x the 50-day moving average.  For the 3rd day in the past 6 sessions, market breadth was negative, and up volume trailed down volume by a large margin.  Advancing stocks lagged decliners by -1104 (compared to +804 Friday), or 0.46:1.  Up volume lagged down volume by 0.43:1.
     
    Valuation.  The SPX trades at 13.4x estimated 2011 earnings ($96.76) and 11.8x estimated 2012 earnings ($109.75), compared to 13.5x and 11.9x 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 +4.6%, and +5.4%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +14.1% and +29.5%, respectively.
     
    Large-cap banks trade at a median 1.54x tangible book value and 13.0x 2011 consensus earnings, compared to 1.54x tangible book value and 12.9x 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 71.6%, respectively. 
     
    SPX.  On higher volume, the SPX fell -7.89 points, or -0.60%, to end at 1296.39.  Volume rose +3.5% to 750.68 million shares, up from 725.54 million shares Friday and below the 812.06 million share 50-day moving average.  For the 100th consecutive day, its 50-day moving average closed above its 200-day moving average (1302.52 versus 1180.22, respectively).  The SPX closed above its 200-week moving average (1176.51). 
     
    The SPX gapped lower at the open, crossing below the 1300-level immediately and testing 1296.  At 9:40 and 10:00, the index failed twice to rally back to 1300, setting the intra-day high of 1299.68 at 10:00.  Following the second failed rally, the SPX sold off to 1296 by 10:25 and at 10:30, crossed first resistance at 1294.  The morning’s trade set lower highs on its stair step descent, breaching 1290 at 11:20 and settling at 1287 at 11:30.  At 12:40, the SPX set its intra-day low of 1286.37, but traded mostly sideways through 1:00.  A rally took hold after the low that reversed the morning’s trading pattern almost exactly.  At 1:15, stocks retook 1290 and 1294 by 2:20.  Buyers took a small breather, but returned at 3:00 with the index at 1290.  The SPX rallied through the close to finish short of 1300 but close to the opening level.  The index closed -0.47% below its 50-day moving average, closing below that average for the second time in three sessions.  The SPX closed +9.84% above its 200-day moving average.  The SPX closed below its 20-day moving average (1318.54) for the fifth straight session.  The 20-day average decreased.
     
    Technical indicators are negative.  The index closed below 1300 for the second time in three sessions.  The index closed above its April 2010 highs for the 70th straight session.  The directional momentum indicator is negative, and the trend is increasing.  Relative strength fell to 44.48 from 47.22, a neutral range.  Next resistance is at 1302.93; next support is at 1288.11. 
     
    BKX.  On lower volume, the KBW bank index closed at 52.12, down -0.43 points, or -0.82%.  Volume fell -10.0% to 97.23 million shares, down from 108.07 million shares Friday and below the 141.24 million share 50-day average.  The index closed +21.27% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -10.06% below its April 23rd closing high. 
     
    Financials underperformed the market, and regionals underperformed large-cap banks.  The BKX gapped lower at the open to 52.20.  The morning trade mirrored the broader market, but the BKX sold-off more severely.  Financials reached an intra-day low of 51.53 at 11:11, a -2.0% drop.  The index traded in a narrow range between 51.60 and 52.80 through 3:15, lagging the SPX’s rebound.  The BKX rallied into the close, crossing 52.00 at 3:40 and almost retook its opening level at the bell. 
     
    Technical indicators are negative.  The index closed above 50 for the 58th straight day.  The BKX closed above its 100- and 200-day moving averages (50.77, and 49.03, respectively), closing above the 200-day average for the 65th straight session.  The index closed below its 20- and 50-day moving averages of 53.37 and 53.60, closing below them for the 14th and 10th straight days, respectively.  The 20- and 50-day moving averages fell and the 20-day closed (by -0.23 points) below the 50-day for the second straight day.  The 50-day moving average closed (by +4.57 points) above the 200-day moving average for the 41st straight session, but the divergence contracted.  The 100-day moving average closed (by +1.74 points) above the 200-day moving average for the 24th straight session, with the positive divergence still expanding.  The directional movement indicator is negative, and the trend is stable.  Relative strength fell to 43.26 from 45.64, a neutral range.  Next resistance is 52.59; next support at 51.59.
     


    Disclosure: I am long CMA, HBAN.
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