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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
  • U.S. Equity Futures Under Pressure on Multiple Eurozone Concerns, Slowing Growth 0 comments
    May 23, 2011 9:03 AM | about stocks: STI, HBAN, BBT, GS, DFS, JNS, NDAQ
    This morning.  U.S. equity markets are in correction.  After fair value adjustment, U.S. equity futures are substantially lower, primarily on European debt, policy, and political concerns.  Asian equity indexes closed lower.  European markets are lower in early trading. Commodity prices are also weaker.  The dollar is stronger.  U.S. Treasury prices are higher.  After a fair value adjustment of +3.72 points, June SPX equity futures are at 1317.00, down -15.72 points and well below 1st and 2nd support.  The SPX opens at 1333.27, -2.22% below its recent April 29 multi-year closing high and +0.60% above its 50-day moving average.  Recall that April’s lowest closing low was 1305.14. Next resistance is at 1339.96.  Next support is at 1328.63.
     
    On Friday, U.S. equities declined on heavier volume. All major indexes fell, as the NYSE composite, SPX, DJI, and Nasdaq declined -0.84%, -0.77%, -0.74%, and -0.71%, respectively. Markets turned immediately lower at the open and fell to the intraday low at 11:00. A mid-day rally pulled indexes nearly back to par, but the rally failed at 3:00, and indexes closed only slightly above the day’s lowest levels. The source of the late weakness was unclear, but may have been attributable to regional Spanish elections of the weekend and other Eurozone concerns in front of the weekend. All market segments closed lower, with industrials, basic materials, and financials the day’s worst performers.  Market breadth was negative.  The distribution day count is 7 on the NYSE, 6 on the SPX and Nasdaq, and 5 on the DJI in the past 25 trading days.  BKX has seen 5 distribution days. Distribution days indicate institutional selling.  Volatility rose +12.3%, and the VIX surged to 17.43 from 15.52 at Thursday’s close.
     
    Asian and Eurozone equity markets are also in correction.  The Nikkei declined -1.52% on economic growth concerns.  Financials were the 9th worst performing segment, down -2.28%. In China, the Hang Seng and Shanghai composite closed lower, down -2.11% and -2.93%, respectively.  Volume rose markedly. The SHCOMP closed at 2774.57, -9.25% below its recent April 18th high 3057.33.  The index trended lower throughout the day, and closed just above the intraday low. Financials were the 2nd best performing segment, but ended -2.55% lower. Trading desks cited European concerns for the day’s weak trade.  In Europe, equity markets are lower.  The EuroStoxx 50, FTSE, and DAX are down -1.76%, -1.51%, and -1.75%, respectively.  On the EuroStoxx, financials are 9th worst performing segment, down -1.97%. Only oil and gas are worst, trading -3.13% lower.
     
    Despite sovereign debt and other macro-concerns, LIBOR levels are well below those seen prior to last year’s sovereign debt crisis.  Overnight USD LIBOR is unchanged at 0.13000%, compared to 0.13000% Friday and 0.25188% at year-end.  USD 3-month LIBOR declined to 0.25675%, compared to 0.25750% Friday and 0.30950% at year-end.  The U.S. dollar is stronger against the euro, yen, and pound.  The dollar, which has trended lower since last June, trades below its 50- and 100-day moving averages, but above its 200-day moving average.  The euro trades at US$1.4029, compared to US$1.4161 Friday and US$1.4309 the prior day.  Since early May, the Euro has trended lower. It still trades well above its 200-day moving average, but has moved below its US$1.4342 50-day moving average and is approaching its US$1.3969 100-day moving average.  The dollar trades at ¥81.84, compared to ¥81.70 Friday and ¥81.61 the prior day.  The yen trades better than its 50-day moving average ¥81.97, which is trending lower.  U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.4999% and 3.105%, respectively, compared to 0.511% and 3.145% Friday.  The yield curve narrowed to +2.606% from +2.634% 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 energy and precious metals, higher aluminum and copper, and lower agriculture. 
     
    U.S. news and economic reporting.  At 8:30, the Chicago Fed National Activity Index reported -0.45, compared to survey 0.20, its worst reading since September 2010.
     
    Overseas news.  In May, the Euro-zone purchaser managers index fell more than expected and reached a seven month low.  During the weekend’s elections, Spain’s opposition party won large cities and regions historically controlled by the ruling Socialist party.  Over the weekend, Standard & Poors cut Italy’s outlook to negative from stable. 
     
    Company news/research:
     
    ·         None.
     
    1Q2011 Earnings.  The first quarter’s earnings results have so far exceeded EPS and revenue expectations.  Of the 454 S&P500 companies that reported earnings to date, 72% (328 of the 424) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies have beat by an average of +7.1% (versus a historical average of +2%).  EPS is up +19.9% over the prior year.  Though challenged in the current operating environment, 341 companies (75%) reported increased revenues and 303 companies (67%) 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.  
     
    With all 24 BKX members reporting, 75% (18 out of 24) beat operating EPS estimates.  Bank revenues disappointed slightly (by -0.78% on average), with 58% of BKX members missing estimates.  Eleven banks (46%) reported increased revenues over the prior year’s quarter.  In the first quarter of 2011, the BKX earned $0.95 per share, a +4.4% increase over 4Q10 EPS of $0.91 and 180% above 1Q10 EPS of $0.34. 
     
    Valuation.  The SPX trades at 13.4x estimated 2011 earnings ($99.13) and 11.9x estimated 2012 earnings ($112.44), compared to 13.6x and 11.9x respective 2011-12 earnings Friday.  The 10-year average median Price/Earnings multiple is 20.0x.  Since the beginning of 2011, analysts increased 2011 and 2012 earnings estimates by +4.8%, and +4.8%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.9% and +32.6%, respectively.
     
    Large-cap banks trade at a median 1.49x tangible book value and 12.8x 2011 consensus earnings, compared to 1.52x tangible book value and 13.0x 2011 earnings Friday.  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 +32.8% and 70.9%, respectively. 
     
    Friday equity markets.  On higher volume, equity markets closed lower.  The NYSE,SPX, DJI, and Nasdaq all finished lower, off -0.84%, -0.77%, -0.74, and -0.71%, respectively.  On a light news day, with no US economic releases, concerns about Greece’s ongoing debt and possible default appear to have sparked the sell-off.  Markets sold off sharply after Fitch cut Greece’s credit rating to B+ from BB+.  After lunch, indexes began to rally, reaching a peak in mid-afternoon, but sold off into the close to end just above the morning’s lows.  Friday capped a 3rd straight week of losses for the SPX, equaling a streak last seen in August 2010.  With a lack of hard news items on Friday, investors were left to speculate on the likelihood and effects of a Greek default. The SPX, while down for the month, does have groups performing well for the month so far.  Utilities, healthcare and consumer staples have outperformed all other sectors and are generally viewed as “safety” sectors. Trading desks report a conviction less trading environment on Friday, with most accounts in a “wait and see” mind frame as the macro issues are resolved. The VIX finished at 17.43, up +12.3% on Friday and up +2.11 for the week.
     
    Technical indicators have worsened, though the SPX, DJI, and Nasdaq managed to close above their respective 50-, 100-, and 200-day moving averages.  The NYSE finished below its 50-day moving average, but above its 100- and 200-day moving averages.  The Bloomberg NYSE new net highs were +44 versus Thursday’s +118.  The relative strength indicator fell to 44.58 from Thursday’s 49.20, moving toward the lower end of a neutral range.
     
    All market segments were negative.  The safety groups lost the least, utilities, telecommunications, and oil and gas. Industrials, basic materials, and financials lost the most.
     
    Financials were decidedly negative. The BKX, XLF, and KRX all finished lower, off -1.80%, -1.38%, and -1.21%, respectively.  The BKX began the day lower and trended lower through the day, closing at the intraday low. The BKX had 1 name up and 23 down. FNFG finished higher, up +0.64%. The laggards were STI (-3.06%), HBAN (-3.04%) and BBT (-2.75%).  The KRX  had two names up and 48 finished lower. Among other financials, GS led the laggard, off -3.10% on concerns about likely Department of Justice subpoenas. Other names that ended lower were DFS (-2.96%), JNS (-2.67%) and NDAQ (-2.41%).  The BKX finished below the 50-, 100-, and 200-day moving averages. The KRX and XLF finished below their 50- and 100-day moving averages, but above the 200-day.  While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -14.3% below its April 2010 high and-39.8% below its best level of 82.55 in September 2008.
     
    NYSE Indicators.  Volume rose +13.8% to 992.37 million shares, from 872.19 million shares Thursday, 1.04x the 50-day moving average.  Market breadth was negative, and up volume lagged down volume.  Advancing stocks lagged decliners by -951 (compared to +552 Thursday), or 0.52:1.  Up volume led down volume by 0.36:1.
     
    SPX.  On higher volume, the SPX fell -10.33 points, or -0.77%, to 1333.27.  Volume rose +13.82% to 761.84 million shares, up from 669.34 million shares Thursday and above the 758.55 million share 50-day moving average.  For the 147th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1325.35 vs. 1238.07, respectively).  The SPX closed above its 200-week moving average (1167.88).
     
    The SPX gapped lower at the open, immediately setting its intra-day high of 1342.00.  Through 10:45, the index fell sharply, crossing 1337-level support at 9:50 and reaching the intra-day low of 1330.67 at 10:45.  Reversing momentum, the index climbed through 1:45, nearly retaking the 1342-opening level.  Unable to hold above 1340, the index fell through the day’s end.  By 3:00, the index had fallen to 1336, and a 3:30 sell-off sent the index to the 1333-level at the close.   
     
    Technical indicators are mixed.  The index’s failure at 1370 and subsequent fall placed equity markets in correction, but the index has found support at its 50-day moving average.  Conversely, the index’s correction has stalled the 50-day average’s positive momentum, and the 50-day will likely cross below the 100-day moving average in the next few weeks.  The index closed above 1300 for the 41st straight session.  The index closed above its April 2010 highs for the 117th straight session.  The SPX closed (by -0.91%) below its 20-day moving average (1345.53) for the sixth straight session.  The index closed (by +0.60%) above its 50-day moving average for the 22nd straight session.  The index closed (by +1.54%) above its 100-day moving average (1313.11) for the 45th straight session.  The SPX closed +7.69% above its 200-day moving average.  The 20-day moving average fell for the first time since May 5th.  The directional momentum indicator is negative for the eighth straight session, and the trend is weak and stable.  Relative strength fell to 47.95 from 53.13, a neutral range.  Next resistance is at 1339.96; next support is at 1328.63. 
     
    BKX.  On higher volume, the KBW bank index fell -0.91 points, or -1.80%, to 49.69.  Volume rose +16.31% to 71.89 million shares, up from 61.81 million shares Thursday but below the 106.84 million share 50-day average.  Recent low volume levels versus historical averages relates to Citigroup’s May 6th 10-1 reverse split.  The BKX closed +15.61% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -14.25% and -10.68% below its April 23,  2010, and February 14, 2011 closing highs, respectively. 
     
    Financials were the market’s worst performing sector, and large-cap banks underperformed regionals.  The BKX opened flat, lost ground immediately, but retook the break-even line by 9:40 to set the intra-day high of 50.66 at 9:43.  From there through the day’s end, the BKX fell consistently, setting consecutive lower lows. By 10:30, the index broke through 50.40 first-level resistance.  By 2:00, the index broke through 50.00.  Just before the closing bell, the BKX tested its 200-day moving average at 49.72.  The bell came on a down-tick of the index, which ended below the 200-day average. 
     
    Technical indicators are negative.  Weakness in the broader markets has removed support for financial stocks.  The index has remained bound on the upside by the 50-day moving average (now at 51.31 and falling), has broken through 100-day moving average support, and again broke through the 200-day moving average (49.72).  The 20-day moving average (50.73) has remained below the 50-day moving average since March 11th  and crossed below the 100-day moving (52.46) average on April 15th.  The 50-day moving average crossed below the 100-day moving average on April 21st.  The index closed below the 20-, 50-, 100-, and 200-day moving averages for the eighth, 31st, 27th, and first consecutive sessions, respectively.  The index closed below 50 for the third time in six sessions.  The 20-, 50-, and 100-day moving averages fell.  The 20-day closed (by -0.58 points) below the 50-day for the 48th straight day, but gap narrowed.  The 50-day moving average closed (by +1.59 points) above the 200-day moving average for the 89th straight session, but gap narrowed.  The 100-day moving average closed (by +2.74 points) above the 200-day moving average for the 71st straight session, but gap narrowed.  The directional movement indicator is negative for the 12th straight session, and the trend is increasing.  Relative strength fell to 38.81 from 46.84, the lower end of a neutral range.  Next resistance is 50.35; next support at 49.35.
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