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U.S. Equity Futures Trend Lower as Budget Deal Eludes Congress, Administration

|Includes:BAC, BK, C, CHCO, COF, CVBF, National Semiconductor Corporation (NSM), PNFP, STI, TCB, XL, ZION
This morning.  Overseas equity markets are weaker, with a lower close in Japan and moderate weakness in Europe after another downgrade of Portuguese debt. Markets were closed for a holiday in China, but after the close of other Asian markets, Chinese monetary authorities raised the one-year lending rate and deposit rates +0.25 bps. U.S. equity futures are modestly lower. U.S. equity markets are in a confirmed uptrend, though the uptrend is based on a weak market confirmation.  The U.S. dollar is a bit stronger, and commodity prices are under pressure. After a fair value adjustment of -0.83 points, June SPX equity futures are at 1326.30, down -2.07 points.  The SPX opens at 1332.87, -0.76% below its February 18th post-Lehman high and +1.73% above its 50-day moving average.  Next resistance is at 1336.71.  Next support is at 1329.07.
Monday, U.S. equity markets traded within a narrow range. Volumes were light, and market volatility was subdued. Financials were middling performers.  Market breath was slightly positive, and up volume led down volume by a small margin. Trading desks cited unsettled budget negotiations in the Congress and light news flows to explain a cautious trading day and lack of investor conviction.
Today, Chinese equity markets were closed. The Nikkei closed down -1.06% on increased volume and recorded a distribution day. After another downgrade of Portugal, the Eurostoxx50, FTSE, and DAX are moderately lower, down -0.56%, -0.29%, and -0.31%, respectively.  On the EuroStoxx, financials are among the worst segment performers, down -1.16% on the day.
Libor continues to trend lower, despite sovereign debt and inflation concerns.  Levels are now comparable to those seen prior to last year’s sovereign debt crisis.  Overnight USD LIBOR is lower at 0.16970%, down from 0.17820% Monday, and compared to 0.25188% at year-end.  USD 3- month LIBOR is lower at 0.29375%, down from 0.29675% Monday and 0.30950% at year-end.  In early trading, the dollar is slightly stronger against the euro and yen, and weaker compared to the 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$1.4190, compared to US$1.4221 Monday and US$1.4237 the prior day.  The Euro trades above its 50-, 100-, and 200-day moving averages.  The dollar trades at ¥84.26, compared to ¥84.06 Friday and ¥84.06 the prior day.  The yen has broken down, rising above its 200-day moving average ¥83.57.  U.S. Treasury yields are slightly lower, with 2- and 10-year maturities yielding 0.758% and 3.403%, respectively, compared to 0.758% and 3.418% Monday. The yield curve narrowed to +2.645% from +2.660% from 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 mixed, but mostly lower, with mixed petroleum but lower natural gas, mixed precious metals, copper and aluminum, and mostly lower agricultural prices.
U.S. news and economic reporting.  Today’s economic reporting is light, with March ISM manufacturing, followed Wednesday by the minutes of the latest FOMC meeting and MBA mortgage applications.
Overseas news.   Today, Moody’s cut Portugal’s sovereign debt rating to Baa1 from A3, the second downgrade in two weeks.  In March, the Euro-zone composite output index (a measure of private sector business activity) fell less than expected.  In February, Euro-zone retail sales fell more than expected.  In March, Japan’s adjusted services purchaser managers index fell to the second lowest reading on record.  Tokyo Electric Power is dumping three million gallons of low-level radioactive water into the Pacific Ocean to relieve pressure inside the Dai-ichi plant's trouble nuclear reactors.   Today, China raised its one-year lending and deposit rates by 25 basis points, marking the fourth increase (totaling 100 basis points) since October.   
Company news/research:
·         XL – announces preliminary loss estimates from Japanese earthquake and tsunami of $190 - $290 million.
·         PACW – downgraded to market perform at KBW, price target remains at $23
·         C – upgraded to outperform at Sanford Bernstein, price target remains at $5.75
·         C – upgraded to outperform at Benchmark
·         COF – price target raised to $64 from $55 at Stifel, maintains outperform rating
·         BK – price target lowered to $33 from $34 at Sandler O’Neill on reduced 2011 EPS estimates, maintains hold rating
·         TCB – at yesterday’s court hearing on the Durbin amendment, the judge rejected both TCB’s motion for an injunction against the pending rule and the government’s motion to dismiss the case.  The court intends to hold a hearing immediately following the Federal Reserve’s issuance of the final rule regulating debit interchange, which will occur sometime between now and July 21st (when statue requires the rule to take effect). 
4Q2010 Earnings.  The latest quarterly earnings results exceeded EPS and revenue expectations.  Of the 497 S&P500 companies that reported earnings to date, 71% (357 of the 497) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +5.5% (versus a historical average of +2%).  EPS is up +36.3% over the prior year.  Though challenged in the current operating environment, 386 companies (78%) reported increased revenues and 327 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 less volume, equity indexes closed mixed. The DJI, SPX and NYSE finished up, +0.19%, +0.03%, and +0.15%, respectively, while the Nasdaq was down -0.01%. All the major indexes saw their highs just after the open, their lows in mid-afternoon, and rallied into the close.  Most traded within a very tight range and without much conviction.  Economic and corporate news flow was extremely light with the biggest story coming after the close when TXN announced a $25 bid for NSM.  Investors seem to be watching whether the Congress comes to a 2011 FY budget deal, and awaiting the beginning of 1Q2011 earnings, which begins in earnest next Monday.  Trading desks reported very light volumes with most investors on the sidelines this week. The VIX finished the day at 17.50, up +0.57%, versus Friday’s 17.40.
Technical indicators remain generally positive. The SPX tested support at 1329 and resistance at 1336 before finishing at 1332.87. The next levels of support for the SPX are 1325 and resistance at 1340.  All the major averages closed above their 200-week, 50-, 100, and 200-day moving averages.  The Bloomberg NYSE new net highs were +366 versus Friday’s +221, above all the key moving averages.  This is the highest amount of new net highs since +368 on January 3rd.  The relative strength index finished at 61.74, compared to 61.10 at the prior close, in the higher end of a neutral range.
Market segments were mixed. Basic materials, health care, and consumer goods led the gainers, up +0.64%, +0.63%, and +0.29%, respectively. The laggards were technology, utilities, and oil and gas.
Financials were mixed. The KRX finished the day higher, up +0.42%. The BKX and XLF were down -0.08% and -0.14%, respectively. Credit cards MA and DFS led all gainers among financials, up +3.04% and +2.03%.  Among regional banks on the KRX, CVBF, PNFP and CHCO led the gainers.  Within the larger cap banks, ZION, BAC and STI had positive days, up at least +0.50%. The BKX and XLF finished below their 50-day moving averages, but above their 200-week, 100-, and 200-day averages. The KRX finished above its 200-week, 50-, 100-, and 200-day average.  While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -9.59% below its April high and -36.54 below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume fell -14.6% to 770.67 million shares, compared to 902.12 million shares Friday, and only 0.75x the 50-day moving average.  Market breadth was modestly positive, and up volume led down volume by only a narrow margin.  Advancing stocks led decliners by +255 (compared to +1163 Friday), or 1.18:1.  Up volume led down volume by 1.04:1.
Valuation.  The SPX trades at 13.7x estimated 2011 earnings ($96.97) and 12.1x estimated 2012 earnings ($109.97), compared to 13.7x 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 +4.8%, and +5.6%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +14.4% and +29.7%, respectively.
Large-cap banks trade at a median 1.60x tangible book value and 13.1x 2011 consensus earnings, compared to 1.58x 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 +28.3% and 72.0%, respectively. 
SPX.  On lower volume, the SPX rose +6.58 points, or +0.50%, to 1332.41.  Volume fell -10.19% to 735.72 million shares, down from 819.23 million shares Thursday and below the 816.36 million share 50-day moving average.  For the 113th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1309.22 versus 1195.29, respectively).  The SPX closed above its 200-week moving average (1174.39). 
The SPX gapped higher at the open, immediately crossing 1328-level resistance and 1330.  By 9:45, the index reached 1334.  A small sell-off retraced gains but enticed buyers.  By 9:50, the index began another rally, rising from 1331 to 1336 by 10:30 and then the intra-day high of 1337.85 at 11:30.  Through the early afternoon, equities traded mostly sideways.  At 2:40, a sharp sell-off sent the SPX from 1336 to its intra-day low of 1328.89 at 3:15.  Trading desks reported index changes at the day’s end prompted position re-allocations and inspired the sell-off. By 3:30, the SPX retook 1330 and broke through 1332 just prior to the closing bell, where it finished. 
Technical indicators are positive.  The index closed above 1300 for the seventh straight session.  The index closed above its April 2010 highs for the 84th straight session.  The SPX closed above its 20-day moving average (1303.44) for the seventh straight session.  The index closed +1.77% above its 50-day moving average, closing above that average for the seventh straight session.  The index closed (by +4.64%) above its 100-day moving average for the 11th straight session.  The SPX closed +11.47% above its 200-day moving average.  All moving averages increased.  The directional momentum indicator is positive for the third consecutive day, and the trend is stable.  Relative strength rose to 60.23 from 58.04, a neutral range.  Next resistance is at 1337.21; next support is at 1328.25. 
BKX.  On lower volume, the KBW bank index rose +0.51 points, or +0.98%, to 52.43.  Volume fell -24.32% to 84.49 million shares, down from 111.64 million shares Thursday and below the 124.61 million share 50-day average.  The index closed +21.99% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -9.53% and -5.14% below its April 23,  2010 and February 15, 2011 closing highs, respectively. 
Financials outperformed the market, and regionals outperformed large-cap banks.  The BKX gapped +1.0% higher at the open, immediately crossing 52.12-level resistance and reaching 52.40.  A 9:50 rally took the index from 52.30 through 52.60 by 10:15 and to the intra-day high of 52.75 by 11:35, a +1.6% gain.  Financials retraced by a larger amount than broader markets in the early afternoon.  By 1:30, the BKX traded back down to 52.50 before the 2:40 sell-off took financials to their intra-day low of 52.25 by 3:20.  The BKX rallied into the close, and finished back above 52.40, its opening level. 
Technical indicators are trending positive.  The index closed above 50 for the 72nd straight day.  The BKX closed above its 20-, 100-, and 200-day moving averages (51.98, 51.53 and 49.24) for the first, 12th, and 79th straight sessions, respectively.  The index closed below the 50-day moving average (53.13), closing below that average 24th straight session.  The 50-day moving averages fell.  The 20-day closed (by -1.15 points) below the 50-day for the 14th straight day, but the negative divergence contracted.  The 50-day moving average closed (by +3.90 points) above the 200-day moving average for the 55th straight session, with the positive divergence contracting.  The 100-day moving average closed (by +2.30 points) above the 200-day moving average for the 38th straight session, with the positive divergence expanding.  The directional movement indicator switched to positive for the first time since February 21st, and the trend is declining.  Relative strength rose to 51.27 from 46.71, a neutral range.  Next resistance is 52.80; next support at 52.01.

Disclosure: I am long BAC, STI, C, XL.