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U.S. Futures Weaken on Slow News Day

|Includes:American International Group Inc (AIG), C, FNFG, JNS, MBFI, MCO, NDAQ, NYCB, PVTB, RF, STBA, STI, STT, WFC
This morning.  U.S. equity markets are in correction.  Asian equity markets closed mixed, while European markets are mixed.  U.S. equity futures are moderately lower.  Economic news is light domestically, though Asian markets appear to anticipate a rate increase in China this weekend. Overseas news focuses on Eurozone sovereign debt concerns. British manufacturing data was weak. U.S. Treasury yields are mixed. The U.S. dollar is mixed.  Commodities markets are mostly lower.  After a fair value adjustment of +1.00 points, June SPX equity futures are at 1277.30, down -5.70 points.  The SPX opens at 1289.00, -5.47% below its recent April 29 multi-year closing high and -3.02% below its 50-day moving average.  The SPX is -1.24% below April’s lowest closing low of 1305.14.  Next resistance is at 1295.82.  Next support is at 1280.91.
Thursday, U.S. equity markets ended moderately higher on lower volume. Disappointingly, markets weakened in the last hour, giving up about a third of the intraday best gains. Recently, late fades have been a feature in the daily trade, and yesterday no particular news seemed to spur the late weakness. The NYSE composite was the day’s best performer, up +0.85%, while the SPX, DJI and Nasdaq added +0.74%, +0.63%, and +0.35% respectively.  Market segments were mixed.  Oil and gas, , telecommunications, and health care were the day’s best performers.  Technology, financials, and basic materials were the worst.  Volatility rose late in the session.  The VIX ended at 18.79, up +3.98% from 18.07 the prior day.  The Nasdaq, NYSE, and SPX recorded distribution days, but there was no change in the distribution day count.  The count numbers 7 on the Nasdaq, DJI, and SPX, and 6 on the NYSE.  Distribution days signal institutional selling in the past  25 trading days.  Trading desks reported a quiet afternoon trade, better to the sell-side, with long sellers on the rallies and few short-sellers.
Asian and European equity markets are also in correction.  Asian markets closed mixed, on trade reports indicating a slowing Chinese economy and a surprise increase in benchmark interest rates in South Korea. Chinese monetary authorities may raise interest rates this weekend. The Nikkei closed up +0.50% on an impressive +32.2% increase in volume.  Most segments closed higher, with telecommunications, oil and gas, and consumer services best. Financials were the 8th worst performing segment, but ended up +0.57%. Only industrials closed lower. Chinese equity markets closed mixed, with the Hang Seng and Shanghai composite down -0.84% and up +0.07%, respectively.  On the SHCOMP, volume fell -12.1%.  Most market segments closed higher.  Utilities, industrials, and technology performed best. Financials fell -0.15%.  The SHCOMP closed at 2705.14, -11.5% below its recent April 18th 3057.33 high, -3.67% below its 2010 close, and -4.93% below the 2845.32 200-day moving average.  However, the SHCOMP closed +1.64% above its 2011 low of 2661.45, set on January 25th.  In Europe, equity markets are modestly lower to mixed, with better strength in basic materials, consumer services, and financials. Industrials, health care and telecommunications are the worst performers.  The EuroStoxx 50, FTSE, and DAX are -0.30%, -0.15%, and +0.04%, respectively.  On the EuroStoxx, financials are the 3rd best performing segment, up +0.11%.
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 0.12700%, from 0.12650% the prior day and 0.25188% at year-end.  USD 3-month LIBOR is lower at 0.24850%, down from 0.24950% the prior day and 0.30950% at year-end.  The U.S. dollar is stronger against the euro and pound, slightly weaker compared to the yen.  The dollar, which has trended lower since last June, trades below its 50-, 100-, and 200-day moving averages.  The euro trades at US$1.4476, compared to US$1.4510 Thursday and US$1.4583 the prior day.  After a sharp decline in early May, the Euro has risen back above its US$1.4423 50-day moving average.  The dollar trades at ¥80.08, compared to ¥80.36 Thursday and ¥79.89 the prior day.  The yen trades better than its 50-day moving average ¥81.81.  U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.400% and 2.964%, respectively, compared to 0.416% and 2.997% Thursday.  The yield curve narrowed to +2.564% from +2.581% 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, mixed aluminum and copper, and lower agriculture.
U.S. news and economic reporting.  Today’s economic reporting is light, limited to May import prices at 8:30.  Import prices rose +0.2%, compared to survey -0.7%.
Overseas news.  Today, the Bundesbank raised its 2011 and 2012 German growth forecasts to +3.1% and +1.8%, compared to prior +2.5% and 1.5% forecasts.  In April, U.K. industrial production fell -1.2% over the prior year’s level, compared to a +1.3% expected increase.  In May, China’s traded surplus came in lighter than expected at $13.05 billion compared to $19.3 billion estimates, and import growth (+28.4% over last year) outpaced export growth (+19.4% over last year).  Today, South Korea’s central bank increased rates to +25 basis points, surprising observers.
Company news/research:
·         AIG – initiated at buy at BofA/ML, price target of $37
·         STI – downgraded to neutral at Macquarie, price target of $26
1Q2011 Earnings.  The first quarter’s earnings results have exceeded EPS and revenue expectations.  Of the 473 S&P500 companies that reported earnings to date, 72% (342 of the 473) 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 +19.7% over the prior year.  Though challenged in the current operating environment, 357 companies (75%) reported increased revenues and 319 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 13.0x estimated 2011 earnings ($99.37) and 11.5x estimated 2012 earnings ($112.52), compared to 12.9x and 11.4x 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 1.38x tangible book value and 12.1x 2011 consensus earnings, compared to 1.38x tangible book value and 12.0x 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 lighter volume, U.S. equity markets finished higher.  The NYSE, SPX, DJI, and Nasdaq ended up +0.85%, +0.74%, +0.63%, and +0.35%, respectively.  The SPX snapped a six-day decline.  Markets began the day higher after the release several economic data points.  Initial jobless claims were slightly higher than estimates, continuing claims were less than expected, and our trade balance narrowed to -$43.7 billion versus the prior month’s -$48.2 billion.  Markets continued higher through the early morning and afternoon to intraday highs at 3:00.  Investors took some profits in the last hour, and markets gave up about a third of their gains, but leaving the DJI and SPX with their first gain this month.  Trading desks report a mixed picture with some desks reporting light buying and short covering, while others reported short sellers returning for the 1st time this month.  The one consistent theme was that of de-risking, as long sellers used this up tape to reduce positions.  The VIX finished the day at 17.77, off -5.43%.
Technical indicators remain negative, though the day provided some positive developments, albeit on lower volume.  The SPX and DJI ended their six session losing streak, their first positive day in the month of June.  The SPX, DJI, and NYSE broke through multiple resistance levels. The SPX broke through resistance at 1285 and 1290, leaving 1300 as the next resistance level. Support remains 1275.  The SPX, DJI, NYSE, and Nasdaq all finished below their 50- and 100-day moving averages, but above their 200-day averages.  The SPX closed  on its 150-day moving average of 1289 after spending the past few sessions below this average.  The Bloomberg NYSE new net highs were -40 versus Wednesday’s -75.  The relative strength indicator rose to 39.99 from Wednesday’s reading of 34.75, still indicating an oversold condition.
Market segments were mixed, but generally positive. Basic materials, oil and gas, and financials were the leaders, while utilities, technology, and telecommunications were the laggards. Telecommunications was the only negative segment.
Financials were one of the best performing sectors. The BKX, XLF and KRX were up, +1.19%, +1.15%, and +0.10%, respectively. The banks led the rally with WFC (+3.39%), STT (+2.92), and C (+2.61) outperforming.  Among broader financials, MCO (+5.88%), JNS (+3.24%), and NDAQ (+3.16%) lead the non-bank financials, while REITS lagged.  The BKX had 20 names advance and 4 decline.  NYB, RF, and FNFG were the laggards in the group, off at least -0.13%.  The KRX had 25 names up, 24 names down and 1 unchanged.  Leaders included SNV, BPFH, and FFBC, while the laggards were PVTB, MBFI, and STBA.  Positive commentary from fund manager Bruce Berkowitz and commentary from sell-side analysts repeating that banks are oversold, helped to spur some value buyers to the sector.  The BKX, KRX, and XLF each finished below their 50-, 100-, and 200-day average.  While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -19.03% below its April 2010 high and -43.16% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume rose +8.38% to 1.013 billion shares, from 934.66 million shares Tuesday, 1.08x the 933.86 million share 50-day moving average.  Market breadth was negative, and up volume trailed down volume.  Advancing stocks lagged decliners by -1437 (compared to +386 Tuesday), or 0.36:1.  Up volume led down volume by 0.32:1.
SPX.  On lower volume, the SPX rose +9.44 points, or +0.74%, to 1289.00.  Volume fell -10.36% to 682.70 million shares, down from 761.57 million shares Wednesday and above the 737.42 million share 50-day moving average.  For the 159th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1329.12 vs. 1252.41, respectively).  The SPX closed above its 200-week moving average (1165.75).
The SPX opened at 1282, modestly above the prior day’s close.  By 9:37, the index almost retraced back to the break-even line in the high 1279 range but never crossed through 1280.  At that time, the SPX set its intra-day low of 1280.23 before a 30-minute, 8 point rally took the index to the 1288 level by 10:05.  Positive momentum lasted through the late afternoon, and the index made successive higher highs.  By 10:35, the index breached 1290 and a 11:45 rally lifted the index above 1292 by 12:05.  Through 2:35, the index traded sideways in a narrow 1292-1293 range before a small rally took the SPX to its intra-day high of 1294.54 at 3:00.  From 3:00 through the close, profit-taking retraced gains back to the 1292 and then to the 1289 level at 3:45.  The index held just below 1290 into the closing bell. 
Technical indicators are negative.  The index’s May 2nd failure at the 1370 level moved stocks into correction.  The SPX broke below the 50-, 100-, and 150-day moving averages.  The 50-day average has remained above the 100-day moving average by a small, but consistent margin.  The index closed below 1300 for the fourth straight session.  The index closed above its April 2010 highs for the 130th straight session.  The SPX closed (by -2.30%) below its 20-day moving average (1319.29) for the seventh straight session.  The index closed (by -3.02%) below its 50-day moving average for seventh straight session.  The index closed (by -2.19%) below its 100-day moving average (1317.88) for the seventh straight session.  The SPX closed +2.92% above its 200-day moving average.  The 20-, 50-, and 100-day moving averages fell for the 13th, fourth, and third straight sessions, respectively.  The last time the 100-day moving average switched from rising to falling was June 23, 2010, six trading days before the 1010.91 bottom on July 1st.  The directional momentum indicator is negative for the seventh straight day, and the trend is moderate and stable. Relative strength rose to 37.26 from 31.92, rebounding from its lowest reading since July 2nd, 2010 and in the lower end of a neutral range. Next resistance is at 1295.82; next support is at 1280.91. 
BKX.  On lower volume, the KBW bank index rose +0.65 points, or +1.19%, to 46.92.  Volume fell -8.27% to 81.13 million shares, down from 88.44 million shares Wednesday and below the 93.88 million share 50-day average.  The BKX closed +9.17% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -19.03% and -15.66% below its April 23,  2010, and February 14, 2011 closing highs, respectively. 
Financials outperformed the market, and large-cap banks outperformed regionals.  The BKX traded similarly to the SPX, albeit with larger gains and a smaller sell-off at the close.  The BKX opened at 46.50, above the prior day’s close of 46.37.  By 9:38, the index had retraced gains and fell through the break-even line, setting the intra-day low of 46.31 in negative territory at that time.  Through 9:55, the BKX rallied sharply back to the 46.80 level.  Between 10:00 and 11:45, the BKX made multiple attempts to break through 46.90.  A quick rally at 11:45 finally succeeded and by 11:55, the index broke through 47.00 as well. A quick consolidation at 12:15 to 46.90 set the stage for another rally at 12:30.  At 1:52, the index reached its intra-day high of 47.18.  Momentum faded, and the BKX retraced gains to the 47.00 level at 2:30 and fell through that level at 3:30.  The BKX finished above 42.82 resistance and the 42.90 threshold. 
Technical indicators are negative.  The market’s correction has withdrawn support for financial stocks.  The index fell through all major moving averages, crossing decisively below the 200-day moving average on June 1st.  The 20-day moving average (48.84 and falling) is below the 50- and 100-day moving averages (50.39 and 51.78, respectively) and the 50-day average is below the 100-day average.  The index closed below the 20-, 50-, 100-, and 200-day moving averages for the 21st, 44th, 40th, and seventh consecutive sessions, respectively.  The index closed below the 50.00 level  for the 12th time in 13 sessions.  The 20-, 50-, and 100-day moving averages fell.  The 20-day closed (by -1.54 points) below the 50-day for the 61st straight day, and the gap expanded.  The 50-day moving average closed (by +0.48 points) above the 200-day moving average for the 102nd straight session, but the gap narrowed and indicates a cross next week.  The 100-day moving average closed (by +1.88 points) above the 200-day moving average for the 84th straight session, but the gap narrowed.  The directional movement indicator is negative for the 24th straight session, and the trend is strong and increasing.  Relative strength rose to 32.48 from 26.12, rebounding from the lowest since January 20, 2009 and moving back into the low end of a neutral range.  Next resistance is 47.31; next support at 46.42.