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Gary Townsend
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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 Move Higher on Strong Earnings Reports 0 comments
    Apr 21, 2011 8:38 AM | about stocks: USB, ZION, RF, FNFG, CBSH, CFR, GBCI, PACW, UMBF, BRKL, WFC, COF, PNC, BBT, BLK, MS, FHN, STI, INTC
    This morning.  Strong earnings reports continued overnight and this morning, pushing equity futures higher.  Volatility is down, and U.S. Treasury prices little changed. The U.S. dollar is at its weakest since late 2009.  After a fair value adjustment of -1.99 points, June SPX equity futures are at 1332.80, up +6.49 points.  The SPX opens at 1330.36, -0.94% below its February 18th post-Lehman high and -+1.15% above its 50-day moving average.  Next resistance is at 1354.46.  Next support is at 1322.10.
     
    Yesterday’s strong gains were accompanied by higher volume. Equity markets resumed their uptrend. Markets gapped much higher, held strength throughout the day, and closed near their intraday highs. After several strong technology company earnings reports, Nasdaq posted the best gain, closing up +2.10%, though still below its February high. The DJI closed at a new post-Lehman high. Market breadth was positive, and up volume led down volume by a large margin.  Volatility declined through the day.  The number of distribution days was unchanged at 3 on the NYSE, 2 on the DJI, and 1 on the Nasdaq and SPX.  Distribution days, which indicate institutional selling, pressure uptrends and push markets back into correction.  Financials were the worst performing market segment.
     
    Today, Asian equity markets closed higher, with gains attributed to strong U.S. 1Q2011 earnings.  The Nikkei closed up +0.82%.  Financials rose +0.63%.  In China, the Hang Seng and Shanghai composite closed up +0.82% and +0.65%, respectively.  On the SHCOMP, volume rose +1.51% to 12.14 billion shares.  The index gapped higher, and closed at 3026.67.  Financials were the 8th worst performing market segment, up +0.36%.  Chinese equity markets are in a confirmed uptrend, recovering most of their losses after the past November-January correction.  The index is up +13.0% since it correction-low close on January 25th.  In Europe, the Eurostoxx50, FTSE, and DAX are higher, +0.86%, +0.30%, and +0.91%, respectively.  Gains are attributed to strong earnings reports in Europe and the U.S. Financials are the 2nd best performing market segment, up +1.79% on the day, adding to the prior day’s strong gains.
     
    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 unchanged at 0.13350% and compares to 0.25188% at year-end.  USD 3- month LIBOR is unchanged at 0.27375% and compares to 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 weaker against the euro and pound, and stronger 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$1.4606, compared to US$1.4523 Wednesday and US$1.4235 the prior day.  The Euro trades well above its 50-, 100-, and 200-day moving averages.  The dollar trades at ¥82.04, compared to ¥82.56 Wednesday and ¥82.59 the prior day.  The yen trades below its 200-day moving average ¥82.58, which is trending lower.  U.S. Treasury yields are slightly higher, with 2- and 10-year maturities yielding 0.668% and 3.404%, respectively, compared to 0.661% and 3.408% Wednesday.  The yield curve widened to +2.763%, from +2.747% 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 higher, with higher petroleum, natural gas, precious metals, aluminum and copper, and agricultural prices.
     
    U.S. news and economic reporting.  Bank earnings reports continue with PNC, COF, BBT, MS, STI, and BLK. Economic releases focus on the latest week’s initial and continuing jobless claims.
     
    Overseas news.   In March, U.K. retail sales rose, beating expectations for a decline.  In April, the IFO’s German business climate index declined more than expected.  Today, China’s banking regulator asked the country’s financial institutions to conduct stress tests of their loan books and assume a property price decline of as much as 50%.  Tomorrow, opposition protesters in Syria are planning to hold the largest rally to date following the regime’s repealing of the country’s “emergency law.” 
    Company news/research:
    ·         COF - reports 1Q11 GAAP and operating EPS of $2.21 and $2.24 respectively, beating estimates of $1.52
    ·         PNC - reports 1Q11 GAAP and operating EPS of $1.57 and $1.52 respectively, beating estimates of $1.37
    ·         BBT - reports 1Q11 GAAP and operating EPS of $0.32 and $0.32 respectively, beating estimates of $0.30
    ·         BLK - reports 1Q11 GAAP and operating EPS of $2.91 and $2.96 respectively, beating estimates of $2.76
    ·         MS - reports 1Q11 GAAP and operating EPS of $0.50 and $0.46 respectively, beating estimates of $0.35
    ·         FHN - reports 1Q11 GAAP and operating EPS of $0.15 and $0.15 respectively, beating estimates of $0.04
    ·         STI - reports 1Q11 GAAP and operating EPS of $0.08 and $0.22 respectively, beating estimates of $0.11
     
    1Q2011 Earnings.    The first quarter’s earnings results have so far exceeded EPS and revenue expectations.  Of the 78 S&P500 companies that reported earnings to date, 74% (58 of the 78) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies have beat by an average of +9.1% (versus a historical average of +2%).  EPS is up +17.5% over the prior year.  Though challenged in the current operating environment, 57 companies (73%) reported increased revenues and 60 companies (77%) 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 21 BKX members to have reported earnings thus far, 81% (17 of 21) have beat earnings estimates on an operating basis.  Revenues have so far disappointed (by -0.97% on average), with 60% of BKX members missing 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 13.6x estimated 2011 earnings (increased to $97.74 from $97.59) and 12.0x estimated 2012 earnings ($110.87), compared to 13.5x and 11.8x 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 +3.3%, and +3.3%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +15.3% and +30.8%, respectively.
     
    Large-cap banks trade at a median 1.51x tangible book value and 12.0x 2011 consensus earnings, compared to 1.51x tangible book value and 12.3x 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 +29.8% and 71.6%, respectively. 
     
    Wednesday’s equity markets.  On increased volume, equity markets closed higher, enjoying their best day this month after strong earnings reports from tech stalwarts INTC, YHOO, and IBM.  Indexes gapped several points higher, and traded within a narrow range through the balance of the day, closing modestly below their intraday highs. Volatility declined markedly.  The Nasdaq, DJI, NYSE, and SPX closed up, +2.10%, +1.52%, +1.51%, and +1.35%, respectively.  The DJI was the only index able to make new highs, as the SPX and Nasdaq closed below their February 18th highs.  A large number of companies (145) released earnings on Wednesday, and 76% met or beat street EPS estimates.  Economic news was positive with MBA mortgage applications rising 5.3% and existing homes sales showing a 3.7% gain month over month versus an estimate of 2.5%.  Trading desks report heavier activity than normal in this holiday shortened week, which was attributed to the INTC’s surprisingly strong earnings.  After opening on a two year low of 14.30The VIX closed at 15.07, off -4.80%.
     
    Technical indicators are mixed, but improving. The DJI and NYSE traded through 3 resistance levels early in the session.  The Nasdaq actually tested support (2791) in the first hour.  The SPX was range bound, testing neither support or resistance. All the major indexes finished above their 20-, 50-, 100-, and 200-day and 200-week moving averages. The Bloomberg NYSE new net highs were +166 versus Tuesday’s -7 reading.  The Investment Company Institute (NYSEARCA:ICI) showed a reversal in domestic equity funds with +$495 million (April 13th) in inflows versus the previous weeks outflows of -$644 million (April 6).  The relative strength indicator closed at 56.73 versus Wednesday’s 47.94, moving into the higher end of a neutral range.  The AAII investor sentiment report for the latest week (April 21) fell to 32.16 from 42.30 the prior week.
     
    All market segments were positive. Technology, oil and gas, and industrials led the gainers, while financials, telecommunications, and health care led the laggards.
     
    ·        Financials were mixed. The XLF and KRX both finished higher, each up +0.25%, while the BKX was lower, off -0.48%.  Overall, bank stocks behaved as if they were a source of funds, with the large caps under pressure this entire earnings season.  WFC reported earnings per share of $0.67, in-line with estimates, but revenues disappointed and the stock finished -4.12% lower. Other notable decreases in the BKX were USB, ZION, and RF, each off -1.50%.  Gainers included smaller regional names such as FNFG, CBSH, and CFR, each up +1.10%. The smaller regional banks fared better overall. KRX leaders included GBCI (+3.16%), PACW (+3.08%), and UMBF (+2.71%).  BRKL was the exception, off -10.53% on the day after announcing a bid for Rhode Island based BARI.  The BKX, XLF, and KRX finished below their 50-, and 100-day moving averages, but above their 200-day and 200-week average.  While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -13.3% below its April 2010 high and -39.1% below its best level of 82.55 in September 2008.
    ·          
    NYSE Indicators.  Volume rose +14.9% to 961.24 million shares, from 836.38 million shares Tuesday, 0.96x the 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +1985 (compared to +1026 Tuesday), or 4.85:1.  Up volume led down volume by 3.30:1.
     
    SPX.  On higher volume, the SPX rose +17.74 points, or +1.35%, to close at 1330.36.  Volume rose +18.9% to 807.56 million shares, up from 679.43 million shares Tuesday and above the 788.90 million share 50-day moving average.  For the 126th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1315.23 vs. 1212.01, respectively).  The SPX closed above its 200-week moving average (1171.57).
     
    The SPX gapped higher at the open, immediately crossing first resistance at 1315 and opening at 1325, the day’s low.  By 10:15, the index had rallied to the intra-day high of 1332.66.  Momentum halted but did not reverse.  While the index retraced gains back to the 1330 level by 11:30 and the 1328 level by 1:15, trading occurred in a narrow range throughout the day.  The index closed on a rally above 1330 to finish with healthy gains. 
     
    Technical indicators are mixed, but improving.  While moving day averages are configured bullishly, and the market has resumed its uptrend, the SPX has neither achieved new yearly highs nor broken through important resistance levels.  The index closed above 1300 for the 20th straight session.  The index closed above its April 2010 highs for the 96th straight session.  The SPX closed (by +0.64%) above its 20-day moving average (1321.88) for the first time in three sessions.  The index closed (by +1.15%) above its 50-day moving average for the first time in three sessions.  The index closed (by +3.15%) above its 100-day moving average for the 24th straight session.  The SPX closed +9.76% above its 200-day moving average.  All moving day averages increased.  The directional momentum indicator is negative for the eighth consecutive session, but has narrowed considerably, and the trend is decreasing.  Relative strength rose to 57.22 from 48.43, a neutral range.  Next resistance is at 1335.64; next support is at 1322.10. 
     
    BKX.  On lower volume, the KBW bank index fell -0.24 points, or -0.48%, to 50.26.  Volume fell -11.4% to 137.93 million shares, down from 155.61 million shares Tuesday but above the 125.05 million share 50-day average.  The index closed +16.9% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -13.3% and -9.65% below its April 23,  2010, and February 14, 2011 closing highs, respectively. 
     
    Financials were the market’s worst performing sector and underperformed for the 6th straight session.  Large-cap banks were the only market subsector with losses, while regionals managed gains on the day.  The BKX gapped higher at the open, fueled by earnings strength and potentially short covering.  The index again set its intra-day high at the opening bell, at 50.78.  Momentum turned negative immediately, and financials through break-even at 9:45 and to the 52.20 level by 9:50.  The BKX attempted a rally back to break-even, but a 10:20 sell-off put the index in negative territory for the day’s remainder.  The index held at 50.40 through 12:15, but a gradual sell-off took the BKX down to first-level support of 52.20 by 12:50.  The index broke through support, and by 2:30, it reached its intra-day low of 52.02.  Financials managed a small rally into the close to finish off the day’s lows, but still closed well into negative territory.   
     
    Technical indicators are turning negative.  The BKX has remained bound on the upside by the 50-day moving average (now at 52.62 and falling) and has fallen through the 100-day moving average.  It remains modestly above a rising 200-day moving average.  The 20-day moving average has remained below the 50-day moving average since March 11th  and crossed below the 100-day moving average on April 15th.  The declining 50-day moving average will cross below a rising 100-day moving average in the next few days.  The index closed below the 20-, 50-, and 100-day moving averages (51.83, 52.62, and 52.27) for the sixth, tenth, and sixth consecutive sessions, respectively.  The index closed above 50 for the 84th straight day.  The BKX closed above its 200-day moving average (49.50) for the 90th straight session.  The 20- and 50-day moving averages fell.  The 20-day closed (by -0.79 points) below the 50-day for the 27th straight day, but the negative divergence contracted.  The 50-day moving average closed (by +3.12 points) above the 200-day moving average for the 68th straight session, but the positive divergence contracted.  The 100-day moving average closed (by +2.77 points) above the 200-day moving average for the 51st straight session, and the positive divergence expanded.  The directional movement indicator is negative for the sixth consecutive day, and the trend is increasing.  Relative strength fell to 32.52 from 34.22, the low end of a neutral range.  Next resistance is 50.71; next support at 49.92.
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