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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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  • U.S. Equity Futures Move Lower after Dreadful May Employment Report 0 comments
    Jun 3, 2011 8:49 AM | about stocks: GS, BAC, WFC, C, CBSH, BBT, COF, CFR, HBAN, FMER, WTNY, GBCI, PVTB, BXS, SNV
    This morning.  U.S. equity markets are in correction. U.S. equity futures are moving lower after release of a disappointing May employment report. U.S. Treasury yields are lower, with the 10-year back below 3.0%, after rising above that level yesterday. The U.S. dollar is weaker.  Commodities markets are mostly lower.  After a fair value adjustment of -0.51 points, June SPX equity futures are at 1296.20, down -15.49 points.  The SPX opens at 1312.94, -3.72% below its recent April 29 multi-year closing high and -1.38% below its 50-day moving average.  The SPX is +0.60% above April’s lowest closing low of 1305.14.  Next resistance is at 1318.78.  Next support is at 1306.36.
     
    Yesterday, U.S. equity markets closed mixed, on lower volume. The Nasdaq rose +0.15%, rebounding weakly from the prior day’s exceptional -2.31% loss. The NYSE composite, SPX, and DJI ended with -0.05%, -0.12%, and -0.34% losses, respectively.  Industrials, financials, and technology led, while utilities, telecommunications, and consumer goods extended the prior day’s losses. Weak same store sales in May hurt retail stocks. After some early session dithering, equities sold off 10:30, after reports that the district attorney for Manhattan had subpoenaed GS concerning its role in the financial crisis. At 11:30, markets bounced off resistance at the April low (1305 on the SPX), and rallied strongly through 3:00, with the SPX and DJI both trading briefly in positive territory. With an eye toward today’s employment report, markets weakened in the final hour to end mixed. Market breadth was negative.  Volatility declined, with the VIX ending at 15.09, down -1.15% from 18.30 the prior day.  As noted above, volume declined, avoiding a distribution day.  Trading desks reported an orderly trade, better to the sell-side, with long sellers on the rallies and few short-sellers.
     
    Asian equity markets remain in correction, and the Eurozone uptrend is under pressure.  Earlier today, the Nikkei closed down -0.66%, on a -19.4% decrease in volume.  Telecommunications ended higher.  Technology and consumer services were lower but were the other best performing segments.  Financials were the 9th worst performing segment, closing down -1.77%.  U.S. economic news and political wrangling explained the day’s weakness. In China, equity markets were mixed, with the Hang Seng and Shanghai composite down -1.31%, while the Shanghai composite rose +0.84%. Trading desks cited caution in front of today’s U.S. employment report. On the SHCOMP, volume fell -21.0% from the prior day.  The SHCOMP closed at 2728.02, -10.8% below its recent April 18th 3057.33 high, -2.85% below its 2010 close, and below the 2843.64 200-day moving average.  However, the SHCOMP closed +2.50% above its 2011 low of 2661.45, set on January 25.  On the day, the SHCOMP opened slightly lower, but rallied through the morning, then traded sideways through the afternoon to close near its intraday high. All market segments closed higher. Health care, consumer goods, and technology were the best performing segments.  Financials were the 8th worst performing segment, but gains +0.45% on the day. In Europe, equity markets are mixed, with better strength in industrials, basic materials, and financials.  Technology, utilities, and health care are the worst performers.  The EuroStoxx 50, FTSE, and DAX are mixed, -0.00%, +0.06%, and +0.35%, respectively.  On the EuroStoxx, financials are 3rd best performing segment, up +0.23%.
     
    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 is unchanged at 0.12650%, compared to 0.12650% Thursday and 0.25188% at year-end.  USD 3-month LIBOR is unchanged at 0.25200%, compared to 0.25288% the prior day and 0.30950% at year-end.  The U.S. dollar is slightly weaker 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$1.4493, compared to US$1.44491 Thursday and US$1.4328 the prior day.  After a sharp decline in early May, the Euro has risen back above its US$1.4378 50-day moving average.  The dollar trades at ¥80.65, compared to ¥8090 Thursday and ¥80.95 the prior day.  The yen trades better than its 50-day moving average ¥82.09.  U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.417% and 2.957%, respectively, compared to 0.457% and 3.030% Thursday.  The yield curve narrowed to +2.540% from +2.573% 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 mostly lower, with lower energy, precious metals, aluminum and copper, but higher agriculture.
     
    U.S. news and economic reporting.  Today’s focus is the May employment report. Survey expects a +165K change in non-farm payrolls, a +170K change in private payrolls, and an unemployment rate of -8.9%. Prior was +244K, 268K and 9.0%, respectively. The report disappointed, with a +54K change in non-farm payrolls, +0.83K in private payrolls, and a rise in the unemployment rate to +9.1%.
     
    Overseas news.  In May, Japan’s composite purchasing managers index rose to 46.2 from 35.0 in April and 36.1 in March.  News reports indicate that European and IMF officials reached a deal to fund Greece through 2014.  In May, the U.K. services purchasing managers index feel more than expected.  Also in May, China’s non-manufacturing purchasing managers index fell to 61.9 from an 11-month high of 62.5 in April.  Chinese news services suggest further central bank rate hikes in June, possibly as early as Monday.  Today in Bahrain, police fired rubber bullets and tear gas on protesters attempting to march towards a central square. 
     
    Company news/research:
     
    ·         GS – nears a sale of its Litton Loan Servicing unit to Ocwen Financial (NYSE:OCN).
     
    1Q2011 Earnings.  The first quarter’s earnings results have exceeded EPS and revenue expectations.  Of the 470 S&P500 companies that reported earnings to date, 72% (338 of the 470) 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, 355 companies (75%) reported increased revenues and 317 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 13.2x estimated 2011 earnings ($99.37) and 11.7x estimated 2012 earnings ($112.52), compared to 13.2x and 11.7x 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 +5.0%, and +4.9%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.2% and +32.7%, respectively.
     
    Large-cap banks trade at a median 1.44x tangible book value and 12.3x 2011 consensus earnings, compared to 1.44x 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 +32.9% and 70.9%, respectively.
     
    Thursday’s equity markets.  On less volume, equity markets finished mixed. The Nasdaq finished higher, up +0.15%, while the DJI, SPX and NYSE were lower, off -0.34%, -0.12%, and -0.05%, respectively.  After Wednesdays’ sharp selloff and before Friday’s employment data, the market spent the day consolidating.  Before Thursdays’ opening, markets received another piece of unfavorable economic news with initial jobless claims higher than estimated.  Markets managed to shake off this news, and opened higher.  Indexes markets spent the morning rallying back and forth through the early morning and then began to selloff after an EIA report showed gasoline and crude oil inventories unexpectedly rising.  Oil and gasoline and the markets fell in tandem.  Indexes reached a low point just before noon and bounced nicely through the afternoon, turning positive just before 3:00, but unable to remain positive in to the close. Investors are beginning to string a number of economic data points that show the economy is slowing, but whether it is a soft patch or slowdown remains to be seen.  The overall bias seems to be to de-risk, and while trading desks report buying and some short covering, we hear sellers using upward moves to lighten overall.  Corporate news has been relatively light and comments coming from CEOs at recent conferences have been relatively positive.  The VIX finished at 18.09 , off -1.15%.
     
    Technical indicators are mixed. The SPX traded in a relatively tight 7 point range consolidating after Wednesday’s -2.30% decline. The SPX did not test current supports of 1303 or 1293. Resistance for the SPX remains 1335 and 1355.  The SPX traded to 1305, its worst levels since early April, but bounced and rallied from that point.  The SPX closed below the 100-day moving average for the first time since March 16th.  Overall, the SPX, DJI, and NYSE all finished below their 50- and 100-day moving averages, but above the 200-day average. The Nasdaq was below the 50-day, but above its 100- and 200-day average.  The AAII Investor Sentiment Bullish reading was 30.18, up from the May 26th reading of 25.61.  The Investment Company Institute (NYSEARCA:ICI) reported its 5th straight week of net outflows for domestic equity funds. Outflows for the week ended May 25th were -$2.391mm, the largest outflow in the previous 5 weeks. The relative strength indicator was slightly lower at 43.37 from Wednesday’s reading of 43.57 and in the lower neutral range.
     
    Market segments were mixed. Industrials, financials, and technology were the leaders, while utilities, telecommunications, and consumer goods were the laggards.
     
    Financials were positive. The BKX, XLF, and KRX finished positively, up +0.17%, +0.10%, and +0.06%, respectively. The BKX opened higher, but sold off sharply in the first hour on a debt downgrade notice from Moody’s concerning BAC, WFC and C.  The notice from Moody’s indicated that ratings were under review for a possible downgrade because each of the ratings currently incorporates an amount of “uplift” from systemic support assumptions during the 2008 financial panic. The market quickly discounted this news and recovered only to sell off again after news of the GS subpoena.  After 1:00, the BKX began a sharp lift, with one minor dip at 2:00, and lifted into the last hour. The last half hour saw some profit taking, but a positive close.  Where banks are concerned, sellers seem to wait for upticks and buyers seem less willing to commit to uptrends.  Trading desks report little short selling in banks.  The BKX had 16 names finish higher, 7 lower and 1 unchanged. Leaders in BKX were CBSH (+1.22%), STT (+1.01%), and BBT (+1.00%). Laggards were COF (-0.45%), CFR (-1.52%), and HBAN (-1.58%). The KRX had 27 names finish higher, 21 lower and 2 unchanged. Leaders in the KRX were FMER, WTNY, and GBCI, up at least +1.25%. The laggards were PVTB, BXS, and SNV. The BKX, KRX, and XLF finished below their respective 50-, 100-, and 200-day moving averages. While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -17.0% below its April 2010 high and -41.7% below its best level of 82.55 in September 2008.
     
    NYSE Indicators.  Volume fell -15.3% to 1.008 billion shares, 1.09x the 50-day moving average, from 1.190 billion shares Wednesday.  Market breadth was negative, and up volume lagged down volume.  Advancing stocks lagged decliners by -180 (compared to -1943 Wednesday), or 0.89:1.  Up volume lagged down volume by 0.80:1.
     
    SPX.  On lower volume, the SPX fell -1.61 points, or -0.12%, to 1312.94.  Volume fell -13.94% to 764.56 million shares, down from 884.88 million shares Wednesday but above the 728.50 million share 50-day moving average.  For the 155th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1331.34 vs. 1247.01, respectively).  The SPX closed above its 200-week moving average (1166.64).
     
    The SPX opened at the prior day’s close and, within 5 minutes, rallied to the intra-day high of 1318.03.  Between 9:35 and 11:00, the index fluctuated between gains and losses.  By 9:50, the SPX dropped into negative territory at the 1310 mark before sharply rebounding back to break-even by 9:55 and nearly retaking the intra-day high by 10:45.  From 10:45 through 11:50, the index fell consistently from the 1318 level down to the intra-day low of 1305.61 at 11:50.  Reversing momentum, buyers provided support at that level, and the index climbed back to break-even by 2:00.  Through the close, the index again fluctuated in a 4 point range above and below the break-even line and finished on a small move down into negative territory.  
     
    Technical indicators are mixed.  The index’s May 2nd failure at the 1370 level and brief breakdown through the 50-day moving average last week found support at the 100-day moving average (1315.43) until Tuesday.  The index closed below the 100-day moving average, albeit by only -0.35%, for the second straight day and for only the fourth time since September 8th, 2010.  While the index’s recent correction has stalled the 50-day average’s positive momentum, the 50-day average has remained above the 100-day moving average by a small, but consistent, margin.  The index closed above 1300 for the 49th straight session.  The index closed above its April 2010 highs for the 125th straight session.  The SPX closed (by -1.53%) below its 20-day moving average (1333.34) for the second straight session.  The index closed (by -1.38%) below its 50-day moving average for second straight session.  The SPX closed +5.29% above its 200-day moving average.  The 20-day moving average fell for the ninth straight session.  The directional momentum indicator is negative for the second straight day, and the trend is weak but increasing.  Relative strength fell to 42.06 from 42.63, a neutral range.  Next resistance is at 1318.78; next support is at 1306.36. 
     
    BKX.  On lower volume, the KBW bank index rose +0.08 points, or +0.17%, to 48.12.  Volume fell -6.24% to 88.88 million shares, down from 94.80 million shares Wednesday and below the 94.58 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 +11.96% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -16.96% and -13.50% below its April 23,  2010, and February 14, 2011 closing highs, respectively. 
     
    Financials gains outperformed the market’s losses, and large-cap banks outperformed regionals.  The BKX opened higher and, by 9:35, rallied to the intra-day high of 48.43.  News that the  Manhattan District Attorney subpoenaed Goldman Sachs over claims made in Senator Levin’s (D-MI) critical report caused a sharp correction in financials.  By 10:05, the BKX had fallen -0.80 points from its high and reached the 47.60 level.  By 11:45, momentum had reversed, and the index retook its break-even.  Through 11:45, the BKX fell back to the 47.80 level before rallying back to break-even by 12:45 and reaching the 48.20 level.  At 2:15 and 3:00, the index made two attempts at retaking the day’s high, but both attempts were sold.  The index fell from the 48.40 level into the close but remained positive. 
     
    Technical indicators are mostly negative.  The market’s correction has withdrawn support for financial stocks.  The index has remained bound on the upside by the 50-day moving average (now at 50.88 and falling), broke down through 100-day support on April 13th, and fell below 200-day moving average support on Wednesday.  The 20-day moving average (49.80) has remained below the 50-day moving average since March 11th  and crossed below the 100-day moving (now at 52.13) 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 16th, 39th, 35th, and second consecutive sessions, respectively.  The index closed below 50 for the seventh time in eight sessions.  The 20-, 50-, and 100-day moving averages fell.  The 20-day closed (by -1.08 points) below the 50-day for the 56th straight day, and the gap expanded.  The 50-day moving average closed (by +1.05 points) above the 200-day moving average for the 97th straight session, but gap narrowed.  The 100-day moving average closed (by +2.30 points) above the 200-day moving average for the 79th straight session, but gap narrowed.  The directional movement indicator is negative for the 19th straight session, and the trend is strong and increasing.  Relative strength rose to 34.49 from 33.66, the low end of a neutral range.  Next resistance is 49.75; next support at 47.66.
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