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Equity Futures Move Lower on Disappointing Empire Manufacturing Report

|Includes:BAC, C, CMA, Capital One Financial Corporation (COF), DFS, HCBK, JPM, MBFI, PBCT, RF, SNV, STT, VLY
This morning.  U.S. equity markets are in correction, and U.S. equity futures are lower, with this morning’s principal negatives the lack of progress on Greek sovereign debt and weak U.S. economic reports. Asian equity markets closed mixed.  European markets are lower. U.S. Treasury prices are higher.  The U.S. dollar is stronger.  Commodities markets are mostly lower.  After a fair value adjustment of -2.48 points, June SPX equity futures are at 1270.70, down -11.02 points.  The SPX opens at 1287.87, -5.55% below its recent April 29 multi-year closing high and -2.88% below its 50-day moving average.  The SPX is -1.32% below April’s lowest closing low of 1305.14.  Next resistance is at 1296.17.  Next support is at 1275.89.
Tuesday, U.S. equity markets moved broadly higher on mixed volume.  Nasdaq volume fell, but rose on the other major indexes. Market breadth was the most positive in the past several weeks, all market segments ended higher, but financials lost the prior day’s leadership. The Nasdaq posted the day’s best gain, up +1.48%, followed by the NYSE composite, SPX, and DJI, which closed up +1.44%, +1.26%, and +1.03%, respectively. Basic materials, oil and gas, and industrials were the leaders, while telecommunications, financials, and utilities were the laggards. Volatility fell. The VIX ended at 18.26, down -6.88% from 19.61 the prior day.  There was no change in the distribution day count, which numbers 7 on the DJI, 6 on the Nasdaq and SPX, and 5 on the NYSE.  Distribution days signal institutional selling in the past  25 trading days.  Trading desks reported a light volume day, with long sellers on rallies, and few new short-sellers.
Asian and European equity markets are also in correction.  Asian markets closed mixed, on disappointment that no agreement was reached on Greece sovereign debt. The Nikkei closed up +0.28% on a +1.42% increase in volume.  Health care, consumer goods, and industrials were the best performers, while oil and gas, telecommunications, and consumer services were the worst. Financials rose +0.17%. Chinese equity markets closed mixed, with the Hang Seng and Shanghai composite down -0.05% and up +1.10%, respectively.  On the SHCOMP, volume fell -10.0%. Telecommunications, oil and gas, and basic materials were the best performers. Technology, utilities, and financials were the worst performers, with financials ending down -1.66%. The SHCOMP closed at 2705.43, -11.5% below its recent April 18th 3057.33 high, -3.66% below its 2010 close, and -5.88% below the 2846.34 200-day moving average.  However, the SHCOMP closed +1.65% above its 2011 low of 2661.45, set on January 25th.  In Europe, equity markets are moderately lower, with better strength in technology, basic materials, and industrials, while consumer goods, oil and gas, and consumer services lag, though all market segments are at least +0.57% higher.  The EuroStoxx 50, FTSE, and DAX are +1.29%, +0.42%, and +1.65%, respectively.  On the EuroStoxx, financials are middling performers, but are up a strong +1.68%.
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 +0.12850% from 0.12750% the prior day and 0.25188% at year-end.  USD 3-month LIBOR is lower at 0.24500%, down from 0.24525% the prior day and 0.30950% at year-end.  The U.S. dollar is stronger against the euro, pound, and 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$1.4288, compared to US$1.4440 Tuesday and US$1.4347 the prior day.  The Euro has moved back below its US$1.4427 50-day moving average.  The dollar trades at ¥80.81, compared to ¥80.49 Tuesday and ¥80.24 the prior day.  The yen trades better than its 50-day moving average ¥81.56.  U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.420% and 3.071%, respectively, compared to 0.440% and 3.097% Tuesday.  The yield curve narrowed to +2.651% from +2.657% 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, higher aluminum and copper, and mixed agriculture.
Options Markets.  The total put/call ratio closed the day at 1.03, in line with its 5-period moving average of 1.09.  The index put/call ratio closed the day at 1.31, also in line with its 5 period moving average of 1.31.  The equity put/call ratio declined from 0.74  yesterday to 0.66, slightly below its 5-period moving average of 0.84.  On balance, these figures indicate that the options markets are exhibiting a more neutral sentiment - this is to be expected as we head into expiration this week and traders close open positions.
U.S. news and economic reporting.  The latest week’s mortgage applications rose +13.0% from the prior week. May CPI was slightly more elevated than survey at +0.2% versus +0.1% survey, +0.3% ex-food and energy versus +0.2% survey. The market focus centered on another poor manufacturing report, with the June Empire manufacturing survey falling to -7.79, compared to 11.88 in May and survey 12.0. 
Overseas news.  Yesterday, European Union finance leaders failed to make any progress on Greece’s second bailout.  Today, large protests and strikes in Greece over newly proposed austerity measures shut down major public services.  Today, Greece’s parliament begins debate on a fresh austerity package while the ruling party vowed to vote down the measure.  Today, Moody’s placed French banks BNP, Credit Agricole, and Societe Generale on downgrade watch over the banks’ exposure to Greek debt.  In May, U.K. consumer confidence rose more than expected.  Today, the Bank of Japan upgraded its economic assessment for the first time since the March earthquake and tsunami. 
Company news/research:
·         COF – May Master Trust data:  card net charge-off rate declines to 4.84% from 4.97%, 30-day delinquencies fall to 3.32% from 3.41%
·         DFS – May Master Trust data:  card net charge-off rate declines to 4.82% from 5.02%, 30-day delinquencies fall to 2.88% from 3.15%
1Q2011 Earnings.  The first quarter’s earnings results have exceeded EPS and revenue expectations.  Of the 474 S&P500 companies that reported earnings to date, 72% (343 of the 474) 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, 358 companies (75%) reported increased revenues and 320 companies (67%) beat revenue estimates.  In the second quarter of 2011, analysts estimate the SPX will earn $24.36 per share, compared to $23.06 and $21.17 per share in 1Q11 and 2Q10, a +5.6% and +15.1% 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.  For the second quarter of 2011, analysts estimate the BKX will earn $0.97 per share, compared to $0.96 and $0.61 per share in 1Q11 and 2Q10, a +1.0% and +59% increase, respectively. 
Valuation.  The SPX trades at 13.0x estimated 2011 earnings ($99.25) and 11.4x estimated 2012 earnings ($112.52), compared to 12.8x and 11.3x 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 +4.9%, and +4.9%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.1% and +32.7%, respectively.
Large-cap banks trade at a median 1.39x tangible book value and 12.3x 2011 consensus earnings, compared to 1.38x tangible book value and 12.4x 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. 
Tuesday’s equity markets. On mixed volume, the equity markets finished markedly higher, though volume was lower on the Nasdaq.  The Nasdaq, NYSE, SPX and DJI all finished higher, up +1.48%, +1.44%, +1.26%, and +1.03%, respectively. The markets were indicated higher after China released a report showing that May industrial production climbed more than estimated, and consumer prices climbed +5.5%, matching estimates.  The S&P futures extended their gains after the U.S. advance retail sales that were better than expected.  At the opening, markets were strong and carried that strength through the morning and into the afternoon.  Markets traded in a relatively tight range throughout the day, but were constantly moving up in small increments, until reaching their intraday high just after 3:00.  Fed Chairman Bernanke’s speech at 2:00 proved to be a non-event as he largely repeated earlier speeches.  In the last hour, some profit taking reduced the day’s gains.  The SPX had its best one-day gain since mid-April on slightly stronger, but unimpressive volume.  Trading desks report that much of the buying was focused on ETFs and futures driven products versus single stock cash buying, indicating that while investors would like to participate in the rally, they remain skeptical and uncommitted to individual securities.  We also heard that long sellers continue to de-risk specific positions and took advantage of the positive day. The VIX finished the day at 18.26, off -6.88%.
Technical indicators are generally negative, with some positive developments.  All the major indices rose through multiple resistance levels.  The SPX, DJI, and NYSE all traded on heavier volume.  The SPX broke through support 1277 and 1282, but met resistance at 1294.  Support remains 1265 for the SPX.  Interestingly, the low price for the day was above the pivot point on the SPX, generally indicating more bullish sentiment.  The SPX, DJI, NYSE, and Nasdaq all remain below their 50- and 100-day moving averages, but above their 200-day moving averages. The Bloomberg NYSE new net highs were +3 versus Monday’s -68.  This was the first positive reading on new net highs since June 1st.  The relative strength indicator rose to 42.61, versus Monday’s reading of 34.26, returning to the low end of a neutral range.
All market segments were positive. Basic materials, oil and gas, and industrials were the leaders, while telecommunications, financials and utilities were the laggards.
Financials finished higher, but lagged the overall market.  The KRX, BKX, and XLF all finished higher, up +1.65%, +0.57%, and +0.50%.  The BKX and XLF traded less volume, while the outperforming KRX traded more.  The BKX began the day higher, seeing its high mark for the day just before 10:00.  The BKX then sold off for the next half hour, only to recover in the next half hour. This trend was constant throughout the day. The largest sell off began just after 1:30 and the BKX set its intraday low of 47.35, but rebounded until 3:00, before fading into the close. The BKX finished the day with 19 names up and 5 down. The down names were JPM, PBCT, C, BAC, and COF.  The leaders were RF, STT, and CMA, each up at least +2.29%.  The KRX finished the day with 48 names up and 2 down.  The leaders were WBS, MBFI, and SNV, each up at least +3.3%. The two laggards were HCBK and VLY. The sell-off among banks preceded the speech by Fed Chairman Ben Bernanke and bounced once the details of his speech were released.  The BKX, KRX, and XLF all finished below their 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 -18.1% below its April 2010 high and -42.5% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume rose +0.78% to 915.41 million shares, compared to 908.34 million shares Monday, 0.98x the 935.28 million share 50-day moving average.  By the best margins in several weeks, market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +1995 (compared to -468 Monday), or 4.84:1.  Up volume lagged down volume by 7.92:1.
SPX.  On higher volume, the SPX rose +16.04 points, or +1.26%, to 1287.87.  Volume rose +2.09% to 698.08 million shares, up from 683.81 million shares Monday but below the 736.05 million share 50-day moving average.  For the 162nd consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1326.00 vs. 1255.72, respectively).  The SPX closed above its 200-week moving average (1164.87).
The SPX gapped higher at the open to the 1283-level, up +0.90%.  At 9:45, the index set its intra-day low of 1283.14  Through 3:00, the index climbed steadily higher, reaching the intra-day high of 1292.50 at 3:04, above the 150-day moving average at 1290.  In trading’s final hour, stocks lost their positive momentum and fell back to the 1287 level by the bell, finishing with healthy gains.
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 thin, but recently narrowing, margin.  The index closed below 1300 for the seventh straight session.  The index closed above its April 2010 highs for the 133rd straight session.  The SPX closed (by -1.69%) below its 20-day moving average (1310.03) for the 10th straight session.  The index closed (by -2.88%) below its 50-day moving average for 10th straight session.  The index closed (by -2.26%) below its 100-day moving average (1317.61) for the 10th straight session.  The SPX closed +2.56% above its 200-day moving average.  The 20- and 50- moving averages fell for the 16th and seventh straight sessions, respectively.  The directional momentum indicator is negative for the 10th straight day, and the trend is moderate and declining. Relative strength rose to 40.96 from 32.56, a neutral range.  Next resistance is at 1296.17; next support is at 1275.89. 
BKX.  On lower volume, the KBW bank index rose +0.27 points, or +0.57%, to 47.45  Volume fell -1.07% to 77.07 million shares, down from 77.90 million shares Monday and below the 93.31 million share 50-day average.  The BKX closed +10.40% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -18.12% and -14.70% below its April 23,  2010, and February 14, 2011 closing highs, respectively. 
Financials underperformed the market, and regionals outperformed large-cap banks.  The BKX gapped higher at the open to the 47.65 level.  The index fluctuated on sharp momentum reversals throughout the day.  At 9:56, the index rallied to its intra-day high of 47.87 before dropping sharply to the 47. 43 level 20 minutes later.  At 10:30 and 12:00, the BKX made two more attempts to break through 47.80, but both were sharply sold.  At 1:40, the index dropped sharply from the 47.60 level to its intra-day low of 47.35 a 1:48. The index again reversed sharply, climbing to 47.75 at 3:00 before retracing back to the 47.38 by 3:40.  The index closed at the bottom end of the day’s range but never threatened negative territory.
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 (48.44 and falling) is below the 50- and 100-day moving averages (50.08 and 51.60, 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 24th, 47th, 43rd, and 10th consecutive sessions, respectively.  The index closed below the 50.00 level  for the 10th straight session.  The 20-, 50-, and 100-day moving averages fell.  The 20-day closed (by -1.64 points) below the 50-day for the 64th straight day, and the gap held steady.  The 50-day moving average closed (by +0.12 points) above the 200-day moving average for the 105th straight session, but the gap narrowed and indicates a cross either tomorrow or Friday.  The 100-day moving average closed (by +1.64 points) above the 200-day moving average for the 87th straight session, but the gap narrowed.  The directional movement indicator is negative for the 27th straight session, and the trend is strong and stable.  Relative strength rose to 39.38 from 36.50, a neutral range.  Next resistance is 47.76; next support at 47.24.