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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 on Cautious Trade 0 comments
    Mar 22, 2011 8:38 AM | about stocks: TCB, ZION, RF, AIG, HIG, FNFG, C
    This morning.  U.S. equity futures are mixed this morning. U.S. equity markets remain in correction.  Japanese markets reopened after yesterday’s holiday and recorded substantial gains, with insurers especially strong. News regarding Japan’s Fukushima Daiichi nuclear complex is mixed, with partial power restored but continued radiation releases.  A widespread release of nuclear contamination implies the near-permanent loss of productive assets in Japan’s northeast, and a corresponding reduction in Japan’s potential GDP.  In Bahrain, the government’s crackdown on mostly Shi’ite protestors restore a semblance of quiet in recent days.  Most attention is on Syria, Yemen, and Libya. European equities are mixed, though financials are one the strongest industry segments. The U.S. dollar is weaker. Commodity prices are lower.  After a fair value adjustment of +0.28 points, June SPX equity futures are at 1292.20, down -1.18 points after fair value adjustment.  The SPX opens at 1298.38, -3.32% below its February 18th post-Lehman high and -0.38% below its 50-day moving average.  Next SPX resistance is at 1305.42.  Next support is at 1286.49.
     
    Monday, U.S. equity markets made strong gains, recouping much of the prior week’s losses, but the gains were concentrated in the session’s first hour, and markets traded within a narrow range through the day’s remainder. Trading was cautious. Financials lagged, perhaps consolidating after Friday’s strong gains. Market breadth was positive.  Volumes declined. For a 3rd consecutive day, market volatility fell markedly, but it remains elevated.  The U.S. dollar weakened, and Treasury yields rose.  Despite gains on three consecutive days, there is no change to our assessment that U.S. equity markets are in correction.  Market corrections typically end on an intraday reversal on increased volume, when confirmed in subsequent trading.
     
    Today, in Asia, Japanese markets reopened after yesterday’s holiday and ended with another exceptional rebound. The Nikkei rose +4.36% on a +3.27% increase in volume. In China, gains were more moderate, with the Hang Seng and Shanghai composite up +0.76% and +0.34%, respectively. China Telecom reported strong 4Q2010 profits. The SHCOMP staged another positive reversal, though on a -1.87% decline in volume. The index is in correction, -2.77% below its recent March 9th high.  In Europe, equity indexes are mixed. The Eurostoxx50, FTSE, and DAX are +0.37%, -0.11%, and -0.20%, respectively.  On the EuroStoxx, oil and gas and financials lead with gains of +1.22% and +1.12%, respectively.
     
    LIBOR trends are remarkable for their steadiness.  Overnight USD LIBOR is lower at 0.20250%, down from 0.20450% Monday, and compared to 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 weaker against euro, yen, and pound.  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$1.4234, compared to US$1.4226 Monday and US$1.4182 the prior day.  The euro trades above its 50-, 100-, and 200-day moving averages.  The dollar trades at ¥80.98, compared to ¥81.03 Monday, and ¥80.58 the prior day.  Treasury yields are higher, with 2- and 10-year maturities yielding 0.657% and 3.352%, respectively, compared to 0.633% and 3.328% Monday.  The yield curve spread is unchanged at +2.695%, compared to +2.695% 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 generally lower, with mixed petroleum, lower natural gas, lower precious metals, higher aluminum, but lower copper, and lower agricultural prices.
     
    U.S. news and economic reporting.  Economic releases begin at 10:00, with the release of the January house price index and the Richmond Fed Manufacturing Index.
     
    Overseas news.  In February, the U.K. inflation rate accelerated more than expected, rising +4.4% over the prior year’s level compared to estimates of +4.2%.  At Japan’s Dai-ichi nuclear plant, three reactors’ cooling systems were functioning, but two other reactors’ systems required further equipment repair over the next two days.  Yesterday, the Arab League expressed some concerns over Libyan no-fly zone military tactics. 
     
    Company news/research:
     
    ·         TCB – upgraded to buy at Stifel Nicolaus, price target of $18
    ·         ZION – upgraded to outperform at Credit Suisse, price target raised to $32 from $26
     
    4Q2010 Earnings.  The latest quarterly earnings results have exceeded EPS and revenue expectations.  Of the 479 S&P500 companies that reported earnings to date, 71% (338 of the 479) 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 +36.9% over the prior year.  Though challenged in the current operating environment, 369 companies (77%) reported increased revenues and 314 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 lower volume, the major indexes all closed higher.  Equities shook off a poor existing home sale report, and the DJI, Nasdaq, NYSE composite, and SPX ended up +1.50%, +1.83%, +1.72%, and +1.50%, respectively.  Following Europe’s lead, the indices all opened higher, but then traded in a relatively tight range through the remainder of the session. The S&P 500 recovered most of last week’s -1.9% loss.  Volatility dropped substantially as the VIX ended -15.7% lower compared to Friday’s close.  With Japanese markets closed for a holiday, investors focused on the positives such ATT’s announced acquisition of T-Mobile USA from Deutsche Telecom, progress in Japan and by coalition forces in Libya. Trading desks indicated a relatively quiet, cautious day with investors adding to, but not initiating, positions. 
     
    Technical indicators are generally negative. The SPX quickly recouped most of last week’s losses, but traded within a very tight range after early gains. One market technician at Bank of America Merrill Lynch, opined that the SPX could re-test the 1249 level and that if support fails, the SPX would subsequently retest of 1170-1220.  The resulting correction at 1170 would be -12.9% below February’s best levels. All the major indexes trade below their 20-day moving averages.  The Nasdaq, NYSE composite, and the SPX are below their 50-day averages.  All major indexes are above their 200-week and 100- and 200-day moving averages. The Bloomberg NYSE new net highs were +26 versus Friday’s +2.  The relative strength indicator moved up to 50.73 from Friday’s 43.70, to the middle of a neutral range.
     
    All market segments except telecommunications were positive.  Oil and gas, industrials, and technology led the markets higher.  Health care and financials, while positive, gained the least.
     
    Financials were mixed, with the KRX and XLF closing up, +1.54% and +0.46%, while the BKX closed -0.15% lower.  Insurance companies AIG and HIG were the leaders, up +5.95%  and  +3.92%, attributed an improving outlook in Japan. Regional banks fared better than money center banks.  RF and FNFG were the leaders, while KEY and C were laggards.  C announced a 1-10 reverse split and a $0.01 dividend. The BKX, KRX and XLF closed below their 20- and 50-day averages, but above their 100-day and 200-week average.  While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -10.35% below its April 2010 high and -37.0% below its best level of 82.55 in September 2008.
     
    NYSE Indicators.  Volume retreated to 1.002 billion shares, down -47.4% from Friday’s options expiration enhanced 1.907 billion shares, from 1.037 billion shares, and 0.93x the 50-day moving average.  For the 3rd consecutive day, market breadth was positive, and up volume exceeded down volume.  Advancing stocks led decliners by +1917 (compared to +1315 Friday), or 4.44:1.  Up volume led down volume by 2.78:1.
     
    Valuation.  The SPX trades at 13.4x estimated 2011 earnings ($96.93) and 11.8x estimated 2012 earnings ($110.10), compared to 13.2x and 11.6x 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 +4.8%, and +5.8%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +14.3% and +29.9%, respectively.
     
    Large-cap banks trade at a median 1.55x tangible book value and 12.9x 2011 consensus earnings, compared to 1.53x tangible book value and 13.0x 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 +27.5% and 71.6%, respectively. 
     
    SPX.  On lower volume, the SPX rose +19.18 points, or +1.50%, to 1298.38.  Volume fell -46.9% to 786.70 million shares, down from an options expiration-inspired 1.481 billion shares Friday, and below the 842.58 million share 50-day moving average.  For the 105th consecutive day, its 50-day moving average closed above its 200-day moving average (1303.32 versus 1185.04, respectively).  The SPX closed above its 200-week moving average (1175.34). 
     
    The SPX gapped higher at the open, breaching 1290 immediately and 1295 by 9:35.  Japan’s improved control over its damaged nuclear site reassured markets while non-Libyan Middle East activity was relatively quiet.  The SPX rallied to 1300 by 10:05, but despite multiple tests of that level through the day, the index failed to breach it convincingly at any point.  The day’s remaining activity was mundane.  The index was range-bound between 1295 and 1300, closing in the towards the higher end of that range. 
     
    Technical indicators are mixed.  The index closed below 1300 for the seventh time in eight sessions.  The index closed above its April 2010 highs for the 75th straight session.  The SPX closed below its 20-day moving average (1304.04) for the 10th straight session.  The index closed -0.38% below its 50-day moving average, closing below that average for the seventh time in eight sessions.  The index closed (by +2.80%) above its 100-day moving average for the third straight session.  The SPX closed +9.56% above its 200-day moving average.  The 20-day average declined.  The directional momentum indicator is negative, and the trend is stable.  Relative strength rose to 49.27 from 42.53, a neutral range.  Next resistance is at 1305.42; next support is at 1286.49. 
     
    BKX.  On lower volume, the KBW bank index closed at 52.01, down -0.08 points, or -0.15%.  Volume fell -29.2% to 170.66 million shares, down from 240.86 million shares Friday and above the 140.66 million share 50-day average.  The index closed +21.01% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -10.25% below its April 23rd closing high. 
     
    Financials underperformed the market, and large-cap banks’ losses underperformed regionals’ gains.  In sympathy with the broader market, the BKX gapped higher at the open, reaching an intra-day high of 52.79 at 9:31, a +1.35% gain.  Momentum quickly reversed, and the BKX decoupled from the broader market’s strength.  The BKX moved gradually lower, crossing 52.60 at 9:45 and 52.40 at 10:00.  At 10:30, a sharp sell-off took the index from 52.30 into negative territory, below the 52.00 level, and to 51.84 by 10:45.  At 11:15, a rally attempt back to break-even was sold, and the index fell gradually to an intra-day low of 51.76 at 12:50.  At 2:30 and 3:45, the index made two more rally attempts to the 52.00 level, and closed just above that level after the second attempt.   
     
    Technical indicators are mixed.  The index closed above 50 for the 63rd straight day.  The BKX closed above its 200-day moving average (49.11) for the 70th straight session and above its 100-day moving average of 51.07.  The index closed below its 20- and 50-day moving averages (52.45 and 53.43, respectively), closing below these averages for the 19th and 15th straight days, respectively.  The 20- and 50-day moving averages fell.  The 20-day closed (by -0.98 points) below the 50-day for the sixth straight day, with the negative divergence expanding.  The 50-day moving average closed (by +4.32 points) above the 200-day moving average for the 46th straight session, with the positive divergence contracting.  The 100-day moving average closed (by +1.96 points) above the 200-day moving average for the 29th straight session, with the positive divergence expanding.  The directional movement indicator is negative, and the trend is decreasing.  Relative strength fell to 45.38 from 45.84, a neutral range.  Next resistance is 52.61; next support at 51.58.


    Disclosure: I am long C.
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