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Gary Townsend - Since 2007, a founding partner, CEO and Portfolio Manager of Hill-Townsend Capital LLC, a long/short equity financial sector fund based in Chevy Chase, Maryland. Mr. Townsend has 30 years banking, regulatory, and investment experience. He started his business career in 1978, as... More
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  • U.S. Futures Lower As 1Q11 Earnings Season Commences 0 comments
    Apr 12, 2011 9:24 AM | about stocks: CMA, RF, FITB, MTB, KEY
    This morning.  U.S. equity futures are moderately lower this morning, reflecting weakness in world equity and also commodity markets. Volatility is up, and U.S. Treasury prices are higher. The U.S. dollar is weaker. Today’s prime mover appears to be Japan’s announcement that it has upgraded its assessment of the nuclear accident at its Dai-Ichi nuclear plant to a level equivalent to Chernobyl. This suggests long-term regional impairment of productive assets.  Also, Alcoa kicked off 1Q2011 earnings season yesterday, but disappointed on revenues. After a fair value adjustment of +0.76, June SPX equity futures are at 1313.30, down -7.06 points.  The SPX opens at 1324.46, -1.38% below its February 18th post-Lehman high and +0.78% above its 50-day moving average.  Next resistance is at 1331.80.  Next support is at 1319.09.
     
    U.S. equity markets are in a confirmed uptrend, though the uptrend is based on a weak market confirmation signal on March 24th.  In yesterday’s trade, stocks declined on mixed volume, shrugging off last Friday’s FY2011 budget agreement. Market breadth was negative, and up volume lagged down volume. Markets opened higher, but without much conviction, lost momentum, and trended lower through most of the afternoon. The Nasdaq and NYA recorded distributions, their 1st in this uptrend. The DJI had a distribution day on March 31st.  Distribution days reflect institutional selling.  
     
    Today, Asian equity markets closed lower.  The Nikkei closed down -1.69% after nuclear safety authorities raised their assessment of the accident. In China, the Hang Seng and Shanghai composite closed down -1.34% and -0.05%, respectively.  Volume fell -0.82% on the SHCOMP, with financials off -0.16%.  As on Monday, the SHCOMP reached its intraday high mid-session, then lost ground through the afternoon before rallying into the close.  The weakness was attributed to inflation and growth concerns. Chinese equity markets are in a confirmed uptrend, recovering from this past November-January correction.  The SHCOMP closed at 3021.37, up +12.8% since it correction-low close on January 25th.  In Europe, the Eurostoxx50, FTSE, and DAX are lower, down -0.82%, -0.96%, and -0.97%, respectively.  Financials are middling performers, down -0.53% 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 0.14400%, down from 15075% Monday, and compared to 0.25188% at year-end.  USD 3- month LIBOR is lower at 0.28075%, down from 0.28275% Monday and 0.30950% at year-end.  In early trading, the dollar is weaker against the 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$1.4495, compared to US$1.4436 Monday and US$1.4483 the prior day.  The Euro trades well above its 50-, 100-, and 200-day moving averages.  The dollar trades at ¥84.15, compared to ¥84.60 Monday and ¥84.76 the prior day.  The yen trades off its 200-day moving average ¥82.50.  U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.790% and 3.534%, respectively, compared to 0.822% and 3.585% Monday.  The yield curve narrowed to +2.744% from +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 mixed, with mixed petroleum, lower natural gas, higher precious metals, lower copper and aluminum, and lower agricultural prices.
     
    U.S. news and economic reporting.  The March NFIB small business optimism report was worse than survey and prior and remains depressed at 91.9.  Import prices were up higher than expected and prior. The February trade balance was slightly higher than survey, but improved from prior. There are several Fed speakers today.
     
    Overseas news.  Energy prices are lower on prospective peace prospects in Libya.  The IMF lowered G-8 economic growth forecasts.  Portugal will start negotiations with the EU and IMF for assistance of as much as $115 billion.  Japan widened its evacuation perimeter around the Dai-Ichi nuclear power plant.
     
    Overseas news.   Today, IMF and European Central Bank officials meet in Lisbon to discuss the terms of Portugal’s $80 billion bailout package.  Japan’s government raised the severity level for the nuclear crisis at the Dai-ichi plant to on par with Chernobyl.  In March, U.K. retail sales declined more than expected and recorded the largest drop since records began.  Also in March, German inflation rose more than expected, reaching a +2.3% annual rate vs. +2.2% forecasts. 
     
    Company news/research:
     
    ·         CMA – initiated at buy at BofA/ML, price target of $43.00
    ·         RF – initiated at buy at BofA/ML, price target of $8.50
    ·         FITB – initiated at buy at BofA/ML, price target of $17.00
    ·         MTB – initiated at neutral at BofA/ML, price target of $92.00
    ·         KEY – initiated at neutral at BofA/ML, price target of $9.50
     
    1Q2011 Earnings.  First quarter earnings reporting began this week, led by Alcoa last evening.  JPMorgan Chase reports on Wednesday and is the first large-cap bank to report earnings.  In the first quarter of 2011, analysts estimate the SPX will earn $24.32 per share, compared to $22.47 and $19.49 per share in 4Q10 and 1Q10, a +8.2% and +24.8% increase, respectively.
     
    In the first quarter of 2011, analysts estimate the BKX will earn $0.93 per share, in-line with 4Q10 earnings and 175% above 1Q10 earnings of $0.34 per share.    
     
    Valuation.  The SPX trades at 13.6x estimated 2011 earnings (increased to $97.36 from $97.21) and 11.9x estimated 2012 earnings ($110.70), 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 +5.3%, and +6.4%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +14.8% and +30.6%, respectively.
     
    Large-cap banks trade at a median 1.59x tangible book value and 12.9x 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 +27.7% and 72.0%, respectively. 
     
    Monday’s equity markets. Equity markets closed mostly lower on mixed volume.  The DJI gained +0.01%, while the NYSE, Nasdaq composite, and SPX fell -0.45%, -0.32%, and -0.28%, respectively.  The markets opened higher, but quickly lost momentum and turned negative after the morning session. Indexes touched their lows just after 3:00.  All the indexes weakly bounced into the close.  Economic and corporate data was light, as the official start of earnings season began just after Monday’s close. Investors seemed concerned by a report from the IMF (International Monetary Fund) that forecast lower growth for the U.S. at 2.85%, down from its 3.0% estimate in January. The IMF stated that higher oil prices and the pace of job growth will restrain the recovery.  Trading desks reported light volumes as accounts awaited earnings reports. The VIX closed at 16.59, down -7.16% versus Friday’s 17.87.
     
    Technical indicators are generally positive, but recent resistance levels have proved tough. The SPX and Nasdaq, each broke through resistance (1331, 2789) early in the day but without conviction. All the major indices closed above their 200-week, 50-,100-, and 200-day moving averages. The Bloomberg NYSE new net highs were +128 versus Friday’s +131 and below the 50- and 100-day moving average, but above the 200-day. The relative strength index closed at 57.15 versus Friday’s 60.83, and in the higher end of a neutral range.
     
    Market segments were mixed. Health care, consumer goods, and consumer services led to the upside, while oil and gas, basic materials and utilities were the laggards.  
     
    ·        Financials were a middling performer. The XLF was unchanged from Friday. The BKX and KRX were down -0.10% and -0.18%. The best performers in financials were FNFG (+1.61%) , JNS (+1.60), SNV (+1.49%),).  Among large cap banks, PBCT, CMA, and CBSH performed well, while HBAN, WFC, and C were among the laggards.  Smaller regional banks that performed well were SBIB, WBS, and UMPQ, while COLB, TCB, and PVTB were the laggards in the KRX.  Earnings season for the banks begins Wednesday with JPM releasing earnings before the open.  The XLF and BKX finished below the 50-day moving average, but above their 200-week, 100- and 200-day moving average.  The KRX finished above all the major moving averages.  While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with BKX closing -9.63% below its April 2010 high and -36.56% below its best level of 82.55 in September 2008.
    ·         
    NYSE Indicators.  Volume was essentially flat, up +0.35% to 818.67, from 815.79 million shares Friday, but 0.81x the 50-day moving average.  Market breadth was negative, and up volume lagged down volume.  Advancing stocks trailed decliners by -1180 (compared to -966 Friday), or 0.44:1.  Up volume led down volume by 0.48:1.
     
    Valuation.  The SPX trades at 13.6x estimated 2011 earnings (increased to $97.36 from $97.21) and 11.9x estimated 2012 earnings ($110.70), 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 +5.3%, and +6.4%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +14.8% and +30.6%, respectively.
     
    Large-cap banks trade at a median 1.59x tangible book value and 12.9x 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 +27.7% and 72.0%, respectively. 
     
    SPX.  On lower volume, the SPX fell -3.71 points, or -0.28%, to 1324.46.  Volume fell -0.05% to 600.98 million shares, down from 601.26 million shares Friday and below the 789.56 million share 50-day moving average.  For the 119th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1314.20 vs. 1202.38, respectively).  The SPX closed above its 200-week moving average (1172.45).
     
    The SPX opened higher, immediately crossing 1330.  By 9:50, the index reached its intra-day high of 1333.77.  Momentum waned, and the index fluctuated in a narrow range between 1329 and 1332 until 12:15 when the index retrace back to breakeven.  At 12:40, the index crossed into negative territory, finding support at 1325.  A small rally at 2:00 could not reach the break-even line and was sold to the intra-day low of 1321.06 at 3:15.  Stocks managed a small rally into the close to finish above 1324.
     
    Technical indicators are positive, but the SPX has clearly struggled to rise above recent resistance levels, a negative signal.  The index closed above 1300 for the 13th  straight session.  The index closed above its April 2010 highs for the 89th straight session.  The SPX closed above its 20-day moving average (1310.41) for the 13th straight session.  The index closed +0.78% above its 50-day moving average, closing above that average for the 13th straight session.  The index closed (by +3.39%) above its 100-day moving average for the 17th straight session.  The SPX closed +10.15% above its 200-day moving average.  All moving averages increased.  The directional momentum indicator switched to negative for the first time in eight sessions, and the trend is declining.  Relative strength fell to 54.56 from 56.80, a neutral range.  Next resistance is at 1331.80; next support is at 1319.09. 
     
    BKX.  On lower volume, the KBW bank index fell -0.05 points, or -0.10%, to 52.37.  Volume fell -24.67% to 70.78 million shares, down from 93.96 million shares Friday and below the 121.17 million share 50-day average.  The index closed +21.85% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -9.63% and -5.86% below its April 23,  2010, and February 14, 2011 closing highs, respectively. 
     
    Financials outperformed the market, and large-caps outperformed regionals.  The BKX opened higher.  By 9:50, the index reached its intra-day high of 52.73.  Financials sold off from the 52.70 level back to 52.60 by 11:00.  Through 12:30, the index gradually declined to 52.50 when a sharper sell-of at 12:40 retraced gains back to break-even at 52.40.  The BKX made a rally attempt to 52.50, but by 2:30, the rally was sold and the index turned negative on the day.  By 3:15, the index had declined to its intra-day low of 52.30.  A small rally in trading’s final 15 minutes lifted the index off its lows, but the BKX closed with a small loss. 
     
    Technical indicators are trending positive, but the BKX has had difficulty rising above its 50 day moving average (53.10).  The index closed above 52 for the seventh consecutive session, and above 50 for the 77th straight day.  The BKX closed above its 20-, 100-, and 200-day moving averages (52.01, 51.86, 49.34) for the 6th, 16th, and 83rd straight sessions, respectively.  The 50-day moving average fell.  The 20-day closed (by -1.09 points) below the 50-day for the 20th straight day, but the negative divergence contracted.  The 50-day moving average closed (by +3.75 points) above the 200-day moving average for the 61st straight session, with the positive divergence contracting.  The 100-day moving average closed (by +2.52 points) above the 200-day moving average for the 44th straight session, with the positive divergence expanding.  The directional movement indicator is positive for the sixth straight session, and the trend is stable.  Relative strength fell to 49.69 from 50.17, a neutral range.  Next resistance is 52.64; next support at 52.20.
     
    Stocks: CMA, RF, FITB, MTB, KEY
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