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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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  • Markets Shrug Off ECB Rate Hike, U.S. Equity Futures Move Modestly Higher 0 comments
    Apr 7, 2011 8:55 AM | about stocks: SNV, STI, FHN, BBT
    This morning.  U.S. equity futures are moderately higher and strengthening after, as expected, the ECB raised its benchmark interest rate by +0.25% to 1.25%. Asian equity markets closed higher, and European markets are slightly higher, though financial stocks are performing well, despite the interest rate rise. U.S. equity markets are in a confirmed uptrend, though the uptrend is based on a weak market confirmation.  Since the uptrend commenced on March 24th, only the DJI has recorded a distribution day.  The U.S. dollar is mixed. After a fair value adjustment of +2.59, June SPX equity futures are at 1331.70, up +0.23 points.  The SPX opens at 1335.54, -0.56% below its February 18th post-Lehman high and +1.80% above its 50-day moving average.  Next resistance is at 1339.58.  Next support is at 1331.29.
     
    Wednesday, U.S. equity markets again traded modestly higher on improved, but unimpressive volumes that were well below 50-day moving averages.  Financials had a strong day and outperformed all other market segments. Short-covering prior to the onset of 1Q2011 earnings season may explain the strength. Market breath was positive, and up volume led down volume.  Perhaps the most impressive aspect of the day was that markets shrugged off a raft of negative news on European sovereign debt, U.S. budget, commodity prices, and Japan. Though markets arguably lack conviction, trading desks reported that short selling activity is extremely light.
     
    Today, Asian equity markets closed mixed.  The Nikkei closed up +0.07% on lower volume. In China, the Hang Seng and Shanghai composite closed -0.01% and +0.22%, respectively.  Chinese equity markets are in a confirmed uptrend, recovering from this past November-January correction. On the SHCOMP, volume declined -12.0%. Financial shares fell -0.14% after the prior day’s strong gains. The SHCOMP closed at 3007.91, its best close since mid-November, and up +12.3% since January 25th.  In Europe, the Eurostoxx50, FTSE, and DAX are modestly higher, up +0.62%, +0.03% and +0.26%, respectively. Financials are up +2.15% 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 0.15700%, down from 0.16280% Wednesday, and compared to 0.25188% at year-end.  USD 3- month LIBOR is lower at 0.28950%, down from 0.29263% Wednesday and 0.30950% at year-end.  In early trading, the dollar is slightly stronger against the euro and pound, but slightly 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$1.4285, compared to US$1.4331 Wednesday and US$1.4223 the prior day.  The Euro now trades well above its 50-, 100-, and 200-day moving averages.  The dollar trades at ¥85.27, compared to ¥84.49 Wednesday and ¥84.87 the prior day.  The yen has broken down, rising above its 200-day moving average ¥82.34.  U.S. Treasury yields are slightly higher, with 2- and 10-year maturities yielding 0.846% and 3.568%, respectively, compared to 0.830% and 3.545% Wednesday. The yield curve widened to +2.722% from +2.715% 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 lower petroleum and natural gas, lower precious metals, but higher copper and aluminum, and higher agricultural prices.
     
    U.S. news and economic reporting.  Today’s economic reporting focuses on the latest week’s initial jobless claims Thursday. Initial claims fell to 382K from 388K the prior week, slightly ahead of survey.
     
    Overseas news.   Today, the European Central Bank raised its benchmark interest rate by +25 basis points to 1.25%, as expected.  Also this morning, the Bank of England maintained its benchmark interest rate at 50 basis points, as expected.  Yesterday, Portugal asked for European Union financial assistance following an unsustainable jump in short term yields.  Today, the Bank of Japan announced a new special lending facility for banks to access short term funding.  Today, China raised retail fuel rates for the second time this year, as expected.  In March, Australia’s unemployment rate fell to 4.9% from 5.0%, surprising estimates of no change. 

    Company news/research:
    ·         SNV – initiated at overweight at Evercore Partners, price target of $3.50
    ·         STI – initiated at overweight at Evercore Partners, price target of $34
    ·         FHN – initiated at overweight at Evercore Partners, price target of $14
    ·         BBT – initiated at equal weight at Evercore Partners, price target of $29
    ·         Banco de Brasil – the company may announce the purchase of a U.S. bank within days, according to its CEO.
     
    4Q2010 Earnings.  The latest quarterly earnings results have exceeded EPS and revenue expectations.  Of the 499 S&P500 companies that reported earnings, 71% (359 of the 499) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +5.6% (versus a historical average of +2%).  EPS is up +36.1% over the prior year.  Though challenged in the current operating environment, 390 companies (78%) reported increased revenues and 329 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.    
     
    Wednesday’s equity markets. On higher volume but unimpressive volume, equity indexes closed modestly higher.  The DJI, which finished up +0.27%, is at its highest close since June 2008. CSCO, which many believe is selling or spinning off its consumer business, rallied +4.9% to lead the DJI higher. The SPX, Nasdaq, and NYSE all finished the day higher, up +0.22%, +0.31%, and +0.23%, respectively.  The SPX, Nasdaq, and NYSE saw their highs in the first hour, lows at noon, and rallied to finish with gains.  Macroeconomic news focused on oil prices, Portugal’s announcement that it will seek EU financial help, the pending ECB action announced this morning, and a possible Federal government shutdown, which investors seemed to shrug off.   Trading desks reported heavy mutual fund buying ahead of next week’s start to earnings season. Notably, financials had their best day since March 17th, with the BKX, KRX and XLF all up at least +1.10%.  The VIX closed at 16.90, off -2.03%, and approaching levels of mid-February, prior to the advent of Libya’s problems.
     
    Technical indicators were generally positive. Most of the major averages climbed through their 1st resistance point at some time during the day. The SPX touched 1339, its 1st resistance and also 1331, its support. All the major averages closed above their 200-week, 50-, 100-, and 200-day moving averages. The Bloomberg NYSE new net highs were +267, versus Tuesday’s +255, but well above the 50-, 100-, and 200-day moving average.  AAII bullish sentiment index has rebounded to 43.59 from 28.49 on March 17th. The relative strength index closed at 63.10 versus Tuesday’s 62.05, moving into the higher end of a neutral range.
     
    Market segments were mixed. Financials, technology, and utilities were the leaders while oil and gas, basic materials, and telecommunications were the laggards.
     
    ·          Financials were the strongest sector. The BKX, XLF, and KRX all closed near their highs for day, up +1.53%, +1.15%, and +1.83%, respectively. Among the regional banks SNV, HCBK, and CATY all closed at least +3.9% higher. The larger cap banks were led by RF, C, and STI, each up at least +2.29%. Late in the afternoon, a news headline that Banco Brasil ($52 billion in assets) would announce the purchase of a U.S. bank within days began the speculation about which bank it would be. Names mentioned included BBX, RF, and SNV. Speculation on trading desks about the strong move in banks was that mutual funds were not exposed to financials enough with the upcoming earnings season a week away. The BKX and XLF finished above their 50-day moving average for the first time since February 25th. The BKX, KRX and XLF all closed above their key moving averages. While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -8.25% below its April 2010 high and -35.59% below its best level of 82.55 in September 2008.
    ·          
    ·          
    NYSE Indicators.  Volume rose +6.61% to 885.55 million shares, compared to 830.6 million shares Tuesday, but 0.86x the 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +420 (compared to +325 Tuesday), or 1.33:1.  Up volume led down volume by 1.64:1.
     
    Valuation.  The SPX trades at 13.7x estimated 2011 earnings (increased to $97.21 from $97.15) and 12.0x estimated 2012 earnings (increased to $110.87 from $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 +5.1%, and +6.5%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +14.7% and +30.8%, respectively.
     
    Large-cap banks trade at a median 1.62x tangible book value and 13.2x 2011 consensus earnings, compared to 1.60x 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 +28.0% and 72.0%, respectively. 
     
    SPX.  On higher volume, the SPX rose +2.91 points, or +0.22%, to 1335.54.  Volume rose +11.00% to 735.17 million shares, up from 662.34 million shares Tuesday, but below the 803.69 million share 50-day moving average.  For the 116th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1311.93 versus 1198.66, respectively).  The SPX closed above its 200-week moving average (1173.53). 
     
    The SPX gapped higher at the open, immediately crossing first resistance at 1337.  By 9:45, the index rallied to its intra-day high of 1339.38.  Momentum reversed, and by 10:15, the SPX fell back to 1335.  A second rally attempt was sold at 10:50, and the index retraced gains back to break-even by 11:35 and set the intra-day low in negative territory at 1331.09 at noon.  By 1:00, a gradual ascent from the flat-line took hold.  The SPX rallied into the close to finish in the middle of the day’s trading range.     
     
    Technical indicators are positive.  The index closed above 1300 for the 10th straight session.  The index closed above its April 2010 highs for the 87th straight session.  The SPX closed above its 20-day moving average (1305.89) for the 10th straight session.  The index closed +1.80% above its 50-day moving average, closing above that average for the 10th straight session.  The index closed (by +4.59%) above its 100-day moving average for the 14th straight session.  The SPX closed +11.42% above its 200-day moving average.  All moving averages increased.  The directional momentum indicator is positive for the sixth consecutive day, and the trend is stable.  Relative strength rose to 61.36 from 60.25, a neutral range.  Next resistance is at 1339.58; next support is at 1331.29. 
     
    BKX.  On higher volume, the KBW bank index rose +0.80 points, or +1.53%, to 53.17.  Volume rose +89.0% to 155.80 million shares, up from 82.45 million shares Tuesday and above the 123.13 million share 50-day average.  The index closed +23.71% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -8.25% and -4.42% below its April 23,  2010 and February 14, 2011 closing highs, respectively. 
     
    Financials were the market’s best performing segment, and regionals outperformed large-cap banks.  The BKX opened higher, setting its intra-day low at the opening bell.  Financials gathered strength all day, moving successively higher and accelerating gains into the close.  By 10:30, the index crossed first resistance at 52.54 and by 10:55, the index had reached 52.80.  Momentum slowed between 11:00 and 1:30, and the BKX traded in a narrow 52.70 to 52.80 range.  At 1:30, a rally took hold that lasted through the close.  By 2:50, the index breached 53.00.  At 3:45, the index set its intra-day high of 52.23, closing just below that level.   
     
    Technical indicators are trending positive.  The index closed above 50 for the 75th straight day.  The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (51.96, 53.12, 51.68 and 49.28) for the first, fourth, 14th, and 81st straight sessions, respectively.  The index closed above the 50-day moving average for the first time since February 25th.  The 20-day moving average fell but the 50-day average rose for the first time since March 11th.  The 20-day closed (by -1.16 points) below the 50-day for the 17th straight day, and the negative divergence expanded.  The 50-day moving average closed (by +3.83 points) above the 200-day moving average for the 58th straight session, with the positive divergence contracting.  The 100-day moving average closed (by +2.40 points) above the 200-day moving average for the 41st straight session, with the positive divergence expanding.  The directional movement indicator is positive for the fourth straight session, and the trend is stable.  Relative strength rose to 57.71 from 50.71, a neutral range.  Next resistance is 53.48; next support at 52.62.


    Disclosure: I am long STI, BBT.
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