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U.S. Equity Futures Strong as Improved Eurozone Sovereign Outlook

|Includes:AFL, CBG, COF, FNFG, Goldman Sachs Group Inc. (GS), HBHC, MS, NDAQ, NTRS, STT, WBS, WTNY, WY, ZION
This morning.  U.S. equity markets remain in correction, but world equity markets are strong today with the strength attributed to optimism regarding Eurozone sovereign debt prospects.  After fair value adjustment, U.S. equity futures are much higher.  U.S. Treasury yields are higher. The U.S. dollar is weaker. Commodities markets are higher.  After a fair value adjustment of -0.05 points, June SPX equity futures are at 1341.00, up +10.95 points.  The SPX opens at 1331.10, -2.38% below its recent April 29 multi-year closing high and +0.13% below its 50-day moving average.  The SPX is +1.99% above April’s lowest closing low of 1305.14.  Next resistance is at 1335.25.  Next support is at 1326.32.
On Friday, U.S. equities again shrugged off disappointing economic reports and ended higher, on lower pre-holiday volume.  The NYSE composite had the best gain, up +0.54%, while the Nasdaq, SPX, and DJI closed +0.50%, +0.41%, and +0.31% higher, respectively.  The bulk of the day’s gains were within the first minutes of the day. Markets gave ground briefly after the initial surge, but rallied to intraday highs before noon. Markets trended lower, but within a narrow range as activity diminished into the close. All market segments closed higher, and market breadth was positive.  The distribution day count was unchanged at 6 on the NYSE, but were unchanged at 6 on the SPX and Nasdaq, and 5 on the DJI in the past 25 trading days.  BKX has seen 4 distribution days.  Distribution days indicate institutional selling.  Volatility mirrored equities’ performance, falling at the open, trending higher until the afternoon rally ensued, weakening and then strengthening into the close.  The VIX ended at 15.98, down -0.68% from 16.09 at Thursday’s close.
Asian and Eurozone equity markets are also in correction, though today’s strength may presage a new uptrend.  Earlier today, the Nikkei closed +1.99% on a +67.7% increase in volume.   Volume was 1.57 billion shares, up from 936.6 million the prior day and the best volume since May 13th, when the NKY fell -0.70%. The gains came despite a no-confidence vote in its parliament and disappointing April industrial production.  Trading desks cited a stronger GDP outlook in coming months and improved Eurozone sovereign debt prospects for the day’s gains. Oil and gas, telecommunications, and utilities were the best performing segments.  Financials were among the laggards, but ended up +1.79%.  In China, the Hang Seng and Shanghai composite closed higher, +2.16% and +1.37%, respectively.  On the SHCOMP, volume rose +3.86% from the prior day.  The SHCOMP closed at 2743.47, -10.3% below its recent April 18th 3057.33 high, -2.30% below its 2010 close, and below the 2842.37 200-day moving average.  However, the SHCOMP closed +3.08% above its 2011 low of 2661.45, set on January 25.  On the day, the SHCOMP opened modestly higher, but struggled through the morning, only gaining after reports that the EU would decide on additional aid for Greece by the end of June. Basic materials, health care, and consumer services were the best performing segments. Financials were a laggard, but gained +0.65%. In Europe, equity markets are also higher, with better strength in oil and gas, industrials, and financials.  Utilities, telecommunications, and technology are the laggards, with the latter segment the only loser, off -1.05%.  Nokia is off -6.5% after lowering its guidance. The EuroStoxx 50, FTSE, and DAX are higher, up +1.72%, +0.84%, and +1.92%, respectively.  On the EuroStoxx, financials are 3rd best performing segment, up +2.03%. Financials are benefiting from views that Greece will receive additional aid.
Despite sovereign debt and other macro-concerns, LIBOR levels are at their lowest levels since early 2009, well below those seen prior to last year’s sovereign debt crisis.  Overnight USD LIBOR rose to +0.12800% from 0.12700% Friday and 0.25188% at year-end.  USD 3-month LIBOR declined to 0.25288% from 0.25388% Friday and 0.30950% at year-end.  The U.S. dollar is lower 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$1.4389, compared to US$1.4282 Friday and US$1.4088 the prior day.  After a sharp decline in early May, the Euro has risen back above its 50-day moving average. The dollar trades at ¥81.60, compared to ¥80.94 Friday and ¥80.80 the prior day.  The yen trades better than its 50-day moving average ¥82.11.  U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.492% and 3.097%, respectively, compared to 0.476% and 3.074% Friday.  The yield curve widened to +2.605% from +2.598% 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 energy, mixed precious metals, higher aluminum and copper, and mixed agriculture.
U.S. news and economic reporting.  Today’s focus is March CaseShiller home prices, May Chicago PMI, NAPM-Milwaukee, and Dallas Fed manufacturing activity. 
Overseas news.  In May, Euro-zone inflation registered a +2.7% year-over-year increase, less than consensus estimates and the prior month’s rate of a +2.8% increase.  According to press reports, Germany is considering dropping its demand for a Greek debt restructuring as a condition for a new bailout package.  In Russia, the central bank increased deposit rates by 25 basis points to 3.5%, surprising observers.  In Japan, April’s industrial output rose less than expected, but manufacturers increased May and June projections more than expected. 
Company news/research:
·         GS – upgraded to outperform at JPMorgan, price target remains at $175
1Q2011 Earnings.  The first quarter’s earnings results have exceeded EPS and revenue expectations.  Of the 468 S&P500 companies that reported earnings to date, 72% (336 of the 468) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies have beat by an average of +7.0% (versus a historical average of +2%).  EPS is up +19.7% over the prior year.  Though challenged in the current operating environment, 353 companies (75%) reported increased revenues and 316 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 ($99.17) and 11.9x estimated 2012 earnings ($112.27), compared to 13.4x and 11.8x 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 +4.6%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.9% and +32.4%, respectively.
Large-cap banks trade at a median 1.48x tangible book value and 12.8x 2011 consensus earnings, compared to 1.49x tangible book value and 12.6x 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’s equity markets. On typically light pre-holiday weekend volume, markets closed higher. The NYSE, Nasdaq, SPX and DJI all finished moderately higher, up +0.54%, +0.50%, +0.41%, and +0.31%, respectively.  The markets opened higher despite in-line personal income and spending reports.  Markets dipped at 10:00, on disappointing pending home sales, but quickly  shrugged off the disappointment and resumed the upward move to intraday highs at noon.  Markets gave back some gains through the afternoon as volume diminished as investors turned their attention to the long weekend.  Market volatility reflected some investor angst regarding various macro-economic concerns and irresolute actions of the G-8, Eurozone finance ministers, and the IMF. The VIX opened at 16.09, retreated to 15.36 at noon, and rose to 16.27 at 3:00, before drifting lower to close at 15.98, off -0.68% on the day.  The VIX is up +8.34% for the month, but off -9.97% for the year.
Technical indicators have improved. The NYSE is the only major average below its 50-day moving average. All are above their respective 100- and 200-day moving averages. The SPX broke through resistance at 1331, traded higher and ended the day back at 1331.  Many technicians regard a break through 1330 suggests a likely near-term move to 1340-1350, just slightly below the April 29 high of 1363.61.  The Bloomberg NYSE new net highs were +35 versus Thursday’s reading of +2.  The relative strength indicator rose to 49.42 from Thursday’s reading of 46.19 and is in the neutral range.  
All market segments were positive.  Basic materials, financials, and technology were the leaders, while oil and gas, healthcare, and utilities were the laggards.
Financials were higher.  The BKX, XLF, and KRX finished higher, up +1.37%, +0.71%, and +0.62%, respectively.  The BKX was up from the open and gained strength through the day.  Commentary from various fund managers regarding oversold bank stocks seems to have taken root Friday, and buyers chased prices and drive the sector higher.  Larger banks led the gains with 15 BKX names at least +1% and 11 of those up over +1.5%.  The BKX had 21 names finish higher and 3 lower. The KRX had 41 names advance, 8 down and 1 unchanged.  Among broader financials, NDAQ gained the most, up +4.06%, with ZION up +2.42% and COF, and MS both up +2.21%.  Leaders on the KRX were WTNY, HBHC, and WBS, each up at least +2.42%. The laggards among broader financials included WY, AFL, and CBG.  The laggards among the larger banks were NTRS, FNFG, and STT.  The BKX finished below its 50-, 100-, and 200-day moving averages.  The KRX and XLF finished below their 50- and 100-day moving averages, but above their 200-day moving averages.  While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -14.2% below its April 2010 high and -39.8% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume declined -18.1% to 692.69 million shares, from 846.11 million shares Thursday, 0.75x the 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +1379 (compared to +1261 Thursday), or 2.69:1.  Up volume led down volume by 3.25:1.
SPX.  On lower volume, the SPX rose +5.41 points, or +0.41%, to 1331.10.  Holiday-weekend volume fell -22.0% to 537.37 million shares, down from 688.90 million shares Thursday and below the 734.31 million share 50-day moving average.  For the 152nd consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1329.31 vs. 1243.40, respectively).  The SPX closed above its 200-week moving average (1167.24).
The SPX gapped higher at the open to the 1329 level.  By 10:00, the index climbed through resistance at 1331 and nearly broke through 1333.  A quick sell-off at 10:00 retraced gains back to the 1328 level, and at 10:10, the index set its intra-day low of 1328.29.  Through 11:20, the index rallied and set the intra-day high of 1334.62 at 11:22.  Momentum waned after 11:30.  The SPX stair-stepped lower through the afternoon, hitting 1332 at 12:30, 1331 at 1:45, and 1329 by 3:00.  At 3:30, the index made a brief but small rally into the close to finish above 1331.   
Technical indicators are mixed but improving in recent sessions.  The index’s failure to pierce resistance at 1370 and subsequent weakness placed equity markets in correction.  Last week’s brief breakdown through its 50-day moving average found support at the 100-day moving average (1315.43) before retaking the 50-day average on Friday’s close.  The index’s correction removed the 50-day average’s positive momentum, and narrowed the gap between the 50- and 100-day moving averages.  The index closed above 1300 for the 46th straight session.  The index closed above its April 2010 highs for the 122nd straight session.  The SPX closed (by -0.51%) below its 20-day moving average (1337.97) for the 11th straight session.  The index closed (by +0.13%) below its 50-day moving average for first time in five sessions.  The index closed (by +1.14%) above its 100-day moving average for the 51st straight session.  The SPX closed +7.05% above its 200-day moving average.  The 20-day moving average fell for the sixth straight session.  The directional momentum indicator is negative for the 13th straight session, and the trend is weak and declining.  Relative strength rose to 49.09 from 46.16, a neutral range.  Next resistance is at 1335.25; next support is at 1326.32. 
BKX.  On lower volume, the KBW bank index rose +0.67 points, or +1.37%, to 49.72.  Volume fell -18.5% to 48.68 million shares, down from 59.72 million shares Thursday and below the 97.01 million share 50-day average.  Recent low financial index volumes versus historical averages relates to Citigroup’s May 6th 10-1 reverse split.  The BKX closed +15.68% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -14.20% and -10.62% below its April 23,  2010, and February 14, 2011 closing highs, respectively. 
Financials outperformed the market, and large-cap banks outperformed regionals.  The BKX gapped higher at the open, immediately crossing first resistance at 49.21 and setting the intra-day low of 49.28 at the bell.  By 10:00, the index rallied to 49.55.  The broader market’s 10:00 sell-off retraced financials’ gains back to the 49.40 level within minutes.  From 10:15 through 11:00, the index rallied to 49.78, the 200-day moving average.  Momentum faded at that level, and another quick sell-off at 11:25 retraced gains to the 49.60 level.  Between 11:30 and 2:40, the index staged a slow and methodical rally, crossing above the 200-day average at 1:55 and setting the intra-day high of 49.83 at 2:40.  At 2:45, another quick but small sell-off retraced gains back to 49.65 by 3:00.  The index made one last rally attempt to the 200-day average, reaching it at 3:35 but again failed to break through.  Financials closed near their day’s highs and above the 49.70 level.   
Technical indicators are mostly negative.  Support for financial stocks is weak.  The index has remained bound on the upside by the 50-day moving average (now at 51.05 and falling).  While the index traded above the 200-day moving average on Friday, the BKX still closed below it, marking the seventh straight close below that level.  The 20-day moving average (50.21) has remained below the 50-day moving average since March 11th  and crossed below the 100-day moving (now at 52.25) 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 13th, 36th, 32nd, and seventh consecutive sessions, respectively.  The index closed below 50 for the sixth straight session.  The 20-, 50-, and 100-day moving averages fell.  The 20-day closed (by -0.85 points) below the 50-day for the 53rd straight day, and the gap expanded.  The 50-day moving average closed (by +1.27 points) above the 200-day moving average for the 94th straight session, but gap narrowed.  The 100-day moving average closed (by +2.47 points) above the 200-day moving average for the 76th straight session, but gap narrowed.  The directional movement indicator is negative for the 16th straight session, and the trend is strong and stable.  Relative strength rose to 44.10 from 35.65, a neutral range.  Next resistance is 50.02; next support at 49.24.