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U.S. Equity Futures Modestly Lower After Chinese Bank Reserve Rate Hike

|Includes:Bank of America Corporation (BAC), C, CBSH, CIM, FITB, FNFG, KEY, PB, PBCT, PFS, RF, ZION
This morning.  After yesterday’s mixed trade, which erased large early losses, the U.S. equity markets’ uptrend remains under pressure.  This morning, U.S. equity futures are lower, after an increase in Chinese bank reserve rates and European sovereign debt concerns.  Volatility is down, and U.S. Treasury prices are slightly lower.  The U.S. dollar is weaker.  After a fair value adjustment of +3.37, June SPX equity futures are at 1311.70, down -4.63 points.  The SPX opens at 1319.68, -1.74% below its February 18th post-Lehman high and +0.33% above its 50-day moving average.  Next resistance is at 1323.81.  Next support is at 1314.61.
Friday’s trade came on better volume above the 50-day moving average.  Markets generally strengthened through the morning session, but gave ground through the afternoon.  All major equity indexes closed higher, with the NYSE composite up +0.48%, while the Nasdaq rose just +0.16%.  The number of distribution days was unchanged.  Distribution days (2 on the DJI and NYSE, and 1 on the Nasdaq, and SPX) pressure uptrends and push markets back into correction.  Market breadth was positive, and up volume led down volume.  Volatility declined to its lowest point since 2007.  Financials ended slightly higher, but were among the worst performing market segments.
Today, Asian equity markets closed mixed, though China raised bank reserve requirements.  The Nikkei closed down -0.36%.  In China, the Hang Seng and Shanghai composite closed mixed, down -0.74% and +0.22%, respectively.  On the SHCOMP, volume rose +7.09% to 13.74 billion shares.  The index gapped lower, rose through the morning session, sold off through most of the afternoon and rebounded into the close to end at 3057.33, .  and closed at 3050.53, , up +14.2% since it correction-low close on January 25th.  Financials were the 8th worst performing market segment, down -0.08%.  Chinese equity markets are in a confirmed uptrend, recovering most of their losses after the past November-January correction.  In Europe, the Eurostoxx50, FTSE, and DAX are lower, -1.37% , -0.81%, and -0.99%, respectively.  For the 3rd consecutive day, financials are the worst performing market segment, down -2.27% on the day.
Libor continues to trend lower, despite sovereign debt and inflation concerns.  Levels are now below those seen prior to last year’s sovereign debt crisis.  Overnight USD LIBOR is lower at 0.13450%, down from 0.13650% Friday, and compared to 0.25188% at year-end.  USD 3- month LIBOR is lower at 0.27400%, down from 0.27475% Friday and 0.30950% at year-end.  A recent rule change regarding bank deposit rates at the Fed, may have pushed some of U.S. deposits offshore.  In early trading, the dollar is mixed against the euro, pound, and 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$1.4301, compared to US$1.4430 Friday and US$1.4488 the prior day.  The Euro trades well above its 50-, 100-, and 200-day moving averages.  The dollar trades at ¥82.82, compared to ¥83.13 Friday and ¥83.50 the prior day.  The yen trades below its 200-day moving average ¥82.60.  U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.669% and 3.371%, respectively, compared to 0.693% and 3.408%, Friday.  The yield curve narrowed to +2.702%, 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 generally lower, with lower petroleum, natural gas, precious metals, higher aluminum, but lower copper and mixed agricultural prices.
U.S. news and economic reporting.  Bank earnings reports continue with KEY and C by 8:00, and ZION after the close.  KEY beat estimates with GAAP EPS of $0.21 versus $0.14.  We calculate operating EPS of $0.22.  C report $0.10, beating estimates by a penny.
Overseas news.   Today, the People’s Bank of China raised the bank reserve requirement by +50 basis points, the forth increase this year.  This morning, the IMF said Greece’s debt load is unsustainable and told the European Central Bank and Euro-zone leaders to consider a restructuring by next year.  Today, Moody’s cut the long-term bank deposit ratings on Ireland’s government-guaranteed banks by two notches. 
Company news/research:
·         KEY – reported 1Q11 GAAP EPS of $0.20 compared to estimates of $0.14.  Operating EPS after removing onetime costs was $0.22
·         CIM – downgraded to market perform at KBW.
·         FNFG – completes merger with NAL
1Q2011 Earnings.    The first quarter’s earnings results have so far exceeded EPS and revenue expectations.  Of the 11 S&P500 companies that reported earnings to date, 73% (8 of the 11) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies missed by an average of -3.5% (versus a historical average of +2%).  EPS is up +21.8% over the prior year.  Though challenged in the current operating environment, 7 companies (64%) reported increased revenues and 9 companies (82%) beat revenue estimates.  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.  
Out of the 4 BKX members to have reported earnings thus far, all have beat estimates on an operating basis, while 75% beat estimates on a GAAP basis.  Revenues have so far surprised, with 75% of BKX members beating estimates.  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 13.5x estimated 2011 earnings ($97.62) and 11.9x estimated 2012 earnings ($110.87), 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 2011, analysts increased 2011 and 2012 earnings estimates by +3.2%, and +3.3%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +15.1% and +30.8%, respectively.
Large-cap banks trade at a median 1.54x tangible book value and 12.7x 2011 consensus earnings, compared to 1.54x tangible book value and 12.6x 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 +28.2% and 72.0%, respectively. 
Friday equity markets.  On higher volume the equity markets closed higher.  The DJI, SPX, NYSE, and Nasdaq finished higher, up +0.46%, +0.39%, +0.31%, and +0.16%, respectively.  The markets began the day higher, but turned sharply lower in the first hour, seeing their lows around 10:00. Equities rebounded just as sharply and climbed through the early afternoon to their intraday highs at 1:00.  The rest of the session was a battle back and forth with the markets drifting lower, but still ending with a small gain.  Economic news showing an expanding economy seemed to drive the markets.  A flat Consumer Price Index (0.5% vs. 0.5% est.) and higher than expected Empire Manufacturing Index (21.70 vs. 17.00 est.) gave the markets a lift early.  A positive report mid-morning from the University of Michigan Confidence Index showing consumer sentiment at 69.6 versus last month’s 68.80 continued the rally.  Markets saw earnings from MAT ($0.05 vs. $0.047) , BAC ($0.17 vs. $0.26), and SCHW ($0.20 vs. $0.18).  The earnings were mixed, but the result from BAC, while initially greeted favorably, weighed on financials after the first half hour of trading.  The VIX saw its lowest point intraday (14.92) since June 2007, but rallied to close at 15.32, off -5.84%.
Technical indicators were generally negative last week.  Friday, the SPX was relatively range bound, trading in a tight 9 point range.  For the SPX, last week set 1300-1302 as support, with secondary support at 1296.  The Nasdaq and NYSE each tested resistance in the early afternoon (2770 and 8407) before moving lower.  The Bloomberg NYSE new net highs were +32 versus +31 on Thursday. The relative strength index closed slightly higher at 53.23 versus Thursday’s 51.00 and in a neutral range.
During the week, we saw outflows for domestic equity funds (-$335.0 million) from the ICI (Investment Company Institute) and a slightly lower AAII bullish sentiment index at 42.30 from 43.59 the previous week.
Market segments were mixed. Utilities, health care, and oil and gas were the leaders with 9 segments closing positively. Technology was the only segment to close off, down -0.51%.
·         Financials were mixed. The KRX and XLF finished up, +0.71% and +0.06%, while the BKX was down -0.16%.  In the pre-market, BAC reported an earnings miss, it affected the large cap banks all day.  The laggards were BAC (-2.36), ZION (-1.07%), and RF (-0.97%).  The leaders were smaller names such as FITB, CBSH, and PBCT, each up at least 1%.  Among the regional banks, WBS, PRSP and PFS rose at least +1.84%.  The KRX had 39 names higher, 9 down, and 2 unchanged as it outperformed the other financial indices.  The BKX and XLF finished the day below their 50- and 100-day moving averages, but above the 200-day and 200-week average. The KRX finished below its 50-day moving average, but above the other key averages.  While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -11.8% below its April 2010 high and -38.16% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume improved to 1.04 billion shares, up +16.3% from 894.31 million shares Thursday, 1.04x the 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +1105 (compared to +227 Thursday), or 2.16:1.  Up volume lagged down volume by 1.77:1.
SPX.  On higher, options-expiration volume, the SPX rose +5.16 points, or +0.39%, to 1319.68.  Volume rose +30.95% to 895.21 million shares, up from 683.47 million shares Thursday and above the 783.50 million share 50-day moving average.  For the 123rd consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1315.36 vs. 1207.83, respectively).  The SPX closed above its 200-week moving average (1172.43).
The SPX opened higher, reaching 1317 at 9:33.  The index quickly retraced back to break-even by 9:45.  A sharp rally at 9:55 took the index from 1314 to 1320 by 10:05.  Failing to break resistance at that level, the index retraced, and by 10:40, the SPX was nearly back to break-even.  A stair-step rally began at 10:45 and lasted through 1:00.  The index broke through 1318 at 11:25, 1320 by 12:15, and 1322 at 12:45.  At 1:00, the index reached its intra-day high of 1322.88.  The SPX traded sideways through 3:00, bounded in the 1322-1320 range.  At 3:15, selling pressure sank the SPX below 1320 and the index could not retake that level into the close. 
Technical indicators are mixed.  While moving day averages are configured bullishly, the SPX has not achieved new highs nor broken through important resistance levels, indicating weakness.  The index closed above 1300 for the 17th straight session.  The index closed above its April 2010 highs for the 93rd straight session.  The SPX crossed back above its 20-day moving average (1316.94) for the first time in three sessions.  The index closed +0.33% above its 50-day moving average, closing above that average for the first time in four sessions.  The index closed (by +2.63%) above its 100-day moving average for the 21st straight session.  The SPX closed +9.26% above its 200-day moving average.  All moving averages increased.  The directional momentum indicator is negative for the fifth consecutive session, and the trend is stable.  Relative strength rose to 52.15 from 49.00, a neutral range.  Next resistance is at 1323.81; next support is at 1314.61. 
BKX.  On higher volume, the KBW bank index fell -0.08 points, or -0.16%, to 51.13.  Volume rose +20.28% to 147.59 million shares, up from 122.71 million shares Thursday and above the 121.61 million share 50-day average.  The index closed +18.96% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -11.77% and -8.09% below its April 23,  2010, and February 14, 2011 closing highs, respectively. 
Financials underperformed the market for the third consecutive day, and large-cap banks’ losses underperformed regionals gains.  The BKX gapped higher at the open, most likely fueled by short covering.  At 9:35, the index reach first-level resistance of 51.64, the intra-day high, and pulled back quickly.  The index fell sharply from the high, retracing gains back to break-even by 10:15 and falling further into negative territory.  At 10:33, the index reached its intra-day low of 51.03.  From 10:45 through 1:00, the BKX rallied with the broader market, retaking break-even by 11:25 and reaching 51.38 at 1:00.  Like the SPX, the BKX traded sideways to slightly down through the afternoon.  At 3:15, financials sold off back to negative territory and closed in the red.   
Technical indicators are turning negative.  The BKX has remained bound on the upside by the 50-day moving average (now at 52.89 and falling).  The 20-day moving average has remained below the 50-day moving average since March 11th.  The index closed below the 20-, 50-, and 100-day moving averages (52.02, 52.89, and 52.10) for the third, seventh, and third consecutive sessions, respectively.  The index closed above 50 for the 81st straight day.  The BKX closed above its 200-day moving average (49.46) for the 87th straight session.  The 20- and 50-day moving averages fell.  The 20-day closed (by -0.87 points) below the 50-day for the 24th straight day, but the negative divergence contracted.  The 50-day moving average closed (by +3.44 points) above the 200-day moving average for the 65th straight session, but the positive divergence contracted.  The 100-day moving average closed (by +2.65 points) above the 200-day moving average for the 48th straight session, and the positive divergence expanded.  The directional movement indicator is negative for the third consecutive day, and the trend is stable.  Relative strength fell to 38.62 from 39.25, the lower end of a neutral range.  Next resistance is 51.51; next support at 50.89.