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Gary Townsend
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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 Uptrend Resumes, Futures Modestly Lower Today 0 comments
    Jul 5, 2011 8:55 AM | about stocks: MTB, ETFC, V, MA, FNFG, HBAN, PBCT, SNV, NPBC, TCB, COLB, FFIN, C, STI, BAC, PRK
    This morning.  The U.S. equity market uptrend has resumed, after the major indexes extended the prior 4 days' gains and rose further above 20- and 50-day moving averages. U.S. equity futures are modestly lower this morning. Asian markets closed mixed, but in a confirmed uptrend.  In Europe, equity markets are mixed and remain in correction.  U.S. Treasury prices are mixed.  The dollar is slightly stronger.  Commodities markets are moderately higher. After a fair value adjustment of +0.02 points, September SPX equity futures are at 1332.50, down -2.52 points.  The SPX opens at 1339.67, -1.76% below its recent April 29 multi-year closing high, but +4.20% and +1.70% above its respective 20- and 50-day moving averages.  The SPX is +6.52% above its 1257.64 year-end close.  Next resistance is at 1347.73.  Next support is at 1324.90.
    Friday, U.S. equity markets again rallied strongly on increased volume, and closed near their intraday highs.  All market segments closed higher, with the greatest strength in financials, industrials, and consumer services. Financials led the markets, ending up +1.82%. Of the major indexes, the Nasdaq posted the best gain, up +1.53%, compared to +1.44%, +1.36%, and +1.27% on the SPX, DJI, and NYSE composite, respectively.  Market breadth was positive.  Volatility declined, but trended higher in the final 2 hours, in front of the long holiday weekend. The VIX ended at 15.87, 16.52, its lowest close since late May, down -3.93% from 16.52 the prior day.  NYSE volume declined -13.2% to 0.89x the 50-day moving average.  Despite the advance, trading desks reported a relatively quiet day, with lighter activity as the afternoon progressed.
    With the uptrend’s resumption, the distribution day count resets to zero, from 6 on the DJI, Nasdaq, SPX, and NYSE.  The BKX count was 7.  Distribution days signal institutional selling in the prior 25 trading days.  
    Asian equity markets closed mixed.  In Japan, equities advances for a sixth consecutive day. The Nikkei closed up +0.07% on a +1.53% increase in volume.  The NKY closed at 9972.46, up +6.61% since June 20th.  Telecommunications, technology, and health care were the segment leaders. Industrials, oil and gas, and consumer services lagged and closed lower. Financials rose +0.29%.  In China, the Hang Seng fell -0.10% while the Shanghai composite rose +0.13% on a -9.42% decrease in volume. The SHCOMP has rallied +7.44% from its June 20th correction low.  The SHCOMP traded within a narrow 15 point range through most of the session, mostly on the lower side, with greater weakness in the afternoon, before a late rally brought the index back to a positive close near the day’s best levels. Health care, technology, and basic materials outperformed. Oil and gas, financials, and telecommunication lagged. Market commentary focused on concerns with the quality of financial statements and that problem loans may be greater than anticipated. Financials closed -0.38% lower. The SHCOMP ended at 2816.35, -7.88% below its recent April 18th 3057.33 high, +0.29% above its 2010 close, and +0.97% above the 2798.46 50-day moving average.  In Europe, the EuroStoxx 50, FTSE, and DAX are mixed, -0.22%, +0.20%, and +0.23%, respectively.  Equity markets opened modestly lower and have traded within narrow ranges. On the Eurostoxx 50, consumer goods, basic materials, and technology are the segment leaders. Telecommunications, utilities, and consumer services are the laggards. Financials are middling performers, down -0.08%.
    Despite sovereign debt and other macro-concerns, LIBOR levels are at their lowest since early 2009, well below those seen prior to last year’s sovereign debt crisis.  Overnight USD LIBOR fell to 0.12500%, from 0.12550% the prior day, and down from 0.25188% at year-end.  USD 3-month LIBOR is unchanged at 0.24575%, compared to 0.24575% the prior day, but down from 0.30950% at year-end.  The U.S. dollar is slightly stronger against the euro, pound, and yen.  The dollar trades slightly below its 74.69 50-day moving average, but well below its respective 75.36 and 77.04 100- and 200-day moving averages.  The euro trades at US$1.4468, compared to US$1.4539 Monday and US$1.4426 the prior day.  The Euro trades above its US$1.4399 50-day moving average.  The dollar trades at ¥81.12, compared to ¥80.80 Friday and ¥80.83 the prior day.  The yen trades better than its 50-day moving average ¥80.86.  U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.450% and 3.156%, respectively, compared to 0.472% and 3.182% Friday.  The yield curve narrowed to +2.706%, from +2.710% 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 higher, with higher energy, precious metals, aluminum, copper, and agriculture.
    U.S. news and economic reporting.  Reporting is light with the release of May factory orders, which are expected to show a +1.0% gain after contracting -1.2% in April. Wednesday’s reporting includes June Challenger job cuts and ISM non-manufacturing. Thursday’s reporting turns to June employment, with the release of ADP employment and the latest week’s initial jobless claims. Friday, the Labor Department releases June non-farm payrolls. 
    Overseas news:  Today, the European Central Bank announced it would continue accepting Greek debt as collateral provided the major credit rating agencies do not declare that any default occurs.  Yesterday, Standard & Poors said the French banks’ proposal for easing Greece’s debt repayment terms would result in a default under the company’s ratings criteria.  In its quarterly “Sakura” report, the Bank of Japan raised its economic assessment for seven of the country’s nine regions, including the region hit hardest by the March earthquake and tsunami.  In June, Japan’s services purchaser managers index rose to 45.4 from 43.8 in May and the 35.0 April-bottom, with the business 12-month-forward expectations index standing at the highest level since June 2009.  In June, China’s non-manufacturing purchaser managers index fell for the fourth consecutive month.  Yesterday, the People’s Bank of China said the country faces large inflationary pressure and it will maintain a “prudent” monetary policy. 
    Company news/research:
    ·         MTB – initiated at neutral at Rochdale, price target of $93
    1Q2011 Earnings.  The first quarter’s earnings results have exceeded EPS and revenue expectations.  Of the 498 S&P500 companies that reported earnings to date, 72% (358 of the 498) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat by an average of +7.0% (versus a historical average of +2%).  EPS is up +19.6% over the prior year.  Though challenged in the current operating environment, 372 companies (75%) reported increased revenues and 335 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 13.5x estimated 2011 earnings (increased to $99.58 from $98.52) and 11.9x estimated 2012 earnings (increased to $112.91 from $112.37), 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 +5.3%, and +5.2%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.5% and +33.2%, respectively.
    Large-cap banks trade at a median 1.42x tangible book value and 13.3x 2011 consensus earnings, compared to 1.42x tangible book value and 13.3x 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 +32.0% and +68.2%, respectively.
    Friday’s equity markets. On slightly less volume, equity markets finished the week at their highest levels since May and with their largest  weekly gains in two years as economic reports signaled renewed manufacturing growth.  The Nasdaq, SPX, DJI, and NYSE closed with impressive gains, up +1.53%, +1.44%, +1.36% and +1.28%, respectively.  The SPX and DJI finished the week higher by +5.60% and +5.43%, respectively.  Futures indicated a breakeven open, but equities slumped at the bell.  The rebound began at 9:40 before the release of University of Michigan Consumer Confidence, which was in-line with expectations.  At 10:00, the June ISM manufacturing report surprised markets positively, and suggested greater strength in the second half of 2011.  Indexes reacted with a strong move. The rally continued through the morning and afternoon. Intraday highs came just before the close.  
    Trading desks reported heightened activity around the release of Friday’s economic data, but that activity slackened, as expected in the afternoon. Most desks with were busy in the financial sector and were overwhelmingly better to the buy side.  Desks also indicated that a level of frustration is apparent among accounts who were not positioned for the strength of this most recent move.  Some investors dismissed last week’s move as “window dressing”, but with Friday’s move and volume, they may end up chasing this market.  The VIX finished the day at 15.87,  off -3.93% and -27.5% for the week.
    Technical indicators were increasingly positive.  All the major indices broke through multiple resistance levels.  The SPX finished the day at 1339, breaking through resistance at 1325 and 1331, before falling just short of 1340.  The SPX finished the week at the highest level since June 1st.  The SPX closed at the high for the week. This was the first advance on the first day of a month since April 1st and marks only the 3rd time that has happened in 2011.  In the past month, the SPX has bounced off the 200-day moving average twice, and now rests comfortably above its 50-, 100-, and 200-day moving averages.  The SPX rallied +5.6% this past week, its largest gain since March 2009. The DJI, NYSE and Nasdaq are also above their respective 50-, 100-, and 200-day moving averages.  The Bloomberg NYSE new net highs were +160 versus Thursday’s +89.  The relative strength indicator rose to 62.56 from Thursday’s reading of 58.27, in the high end of a neutral range.
    All market segments were positive.  Financials, industrials, and consumer services were the leaders, while consumer goods, oil and gas, and basic materials were the laggards. 
    Financials led the markets higher.  The BKX, XLF, and KRX were strong gainers, up +1.86%, +1.82%, and +1.72%, respectively.  Among broader financials ETFC (+4.71%), V (+4.40%), and MA (+4.36%) were the leaders.  The BKX finished with all 24 names higher. Leaders in the BKX were NYB (+3.74%), C (+2.98%), and STI (+2.4%). The laggards included FNFG, HBAN, and PBCT. The KRX finished with all 50 names higher. The leaders were SNV, NPBC, and TCB.  The laggards were COLB, FFIN, and PRK.  Financials received some clarity this week with the release of the surcharge amount for systemically financials important institutions, BAC reaching an agreement on mortgage repurchase, and a better than expected final debit card rates per the Durbin amendment which all contributed to the gains financials experienced this week.  For the week, the BKX gained +6.26%, while the KRX gained +5.21%.  Due to the various moving averages being inverted, the BKX, KRX and XLF all finished above their respective 50-day moving average.  The BKX and XLF finished below their 100- and 200-day moving averages, while the KRX finished below the 100-day, but above its 200-day average. While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -15.07% below its April 2010 high and -40.38% below its best level of 82.55 in September 2008.
    NYSE Indicators.  Volume declined -132% to 865.08 million shares, from 996.05 million shares Thursday, and 0.89x the 972.00 million share 50-day moving average.  By large margins, market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +1973 (compared to +1398 Thursday), or 4.74:1.  Up volume led down volume by 11.4:1.
    SPX.  On lower volume, the SPX increased +19.03 points, or +1.44%, to 1339.67.  Volume fell -15.9% to 638.34 million shares, down from 758.59 million shares Thursday and below the 756.08 million share 50-day moving average.  For the 175th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1317.28 vs. 1268.18, respectively).  The SPX closed above its 200-week moving average (1163.06).
    The SPX opened flat and quickly fell to its intra-day low of 1318.18 at 9:36, down -0.21%.  By 9:40, momentum reversed and the index retook its break-even line by 9:50.  The 10:00 release of June’s ISM manufacturing data showed a surprise increase, and markets responded positively.  By 10:05, the index crossed through first resistance at 1325 and reached 1329.  The SPX rallied methodically for the day’s remainder, crossing 1330 at 10:25, 1335 at 1:10, and 1340 at 3:45.  At 3:48, the index set its intra-day high of 1341.01.  The SPX fell modestly into the close to finish just below 1340, near the day’s highs.    
    Technical indicators are turning positive.  The index’s reversal in June’s second half returned markets to a confirmed uptrend.  For the second straight session, the SPX closed above all moving averages.  The 50-day average remains above the 100-day moving average, and the gap is now expanding as the 50-day average resumed its uptrend last Tuesday.  The SPX closed above 1300 for the third straight session.  The index closed above its April 2010 highs for the 146th straight session.  The SPX closed (by +4.12%) above its 20-day moving average (1286.62) for the fourth straight session.  The index closed (by +1.70%) above its 50-day moving average for the second straight session.  The index closed (by +1.78%) above its 100-day moving average (1316.26) for the second straight session.  The SPX closed +5.64% above its 200-day moving average.  All moving averages increased.  The directional momentum indicator is positive for the third straight session, and the trend is weak but increasing.  Relative strength increased to 63.76 from 58.67, the higher end of a neutral range.  Next resistance is at 1347.73; next support is at 1324.90.
    BKX.  On lower volume, the KBW bank index rose +0.90 points, or +1.86%, to 49.22.  Volume fell -30.40% to 62.76 million shares, down from 90.17 million shares Thursday and below the 82.89 million share 50-day average.  The BKX closed +14.52% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -15.06% and -11.52% below its April 23, 2010, and February 14, 2011 closing highs, respectively. 
    Financials were the market’s best performing segment, and large-cap banks outperformed regionals.  The BKX opened flat but with positive momentum.  On the opening print, the index set its intra-day low of 48.29.  By 9:55, the index rallied to the 48.70 level before the 10:00 economic data boosted the BKX to the 48.80 level.  Through 1:40, the BKX rallied along a consistent trajectory to reach the 49.20 level. Through the day’s remainder, the index traded mostly sideways at 49.20.  A closing bell rally lifted the index to its intra-day high of 49.30 at 3:47.  While the rally retraced prior to the bell, financials closed above 49.20 and near the day’s highs. 
    Technical indicators are improving, but remain mostly negative. Bank stocks significantly underperformed the broader market during the recent correction but have led the market during the past week’s rally that initiated the new uptrend.  The BKX closed above its 50-day moving average for the first time since April 6thThe 20-day moving average (47.21) is below the 50- and 100-day moving averages (48.97 and 50.76, respectively).  The 50-day average is below the 100-day moving average and has been below the 200-day moving average since June 15th.  The index closed above its 20-day moving average for third straight session.  The index closed below the 100- and 200-day moving averages for the 56th and 23rd consecutive sessions, respectively.  The index closed below the 50.00 level for the 22nd straight session.  The 50- and 100-day moving averages fell.  The 20-day closed (by -1.77 points) below the 50-day for the 77th straight day, but the gap narrowed.  The 50-day moving average closed (by -1.03 points) below the 200-day moving average for the 12th straight session, and the gap expanded.  The 100-day moving average closed (by +0.75 points) above the 200-day moving average for the 100th straight session, but the gap narrowed.  The directional movement indicator switched to positive for the first time in 40 sessions (since May 4th), and the trend is strong and declining.  Relative strength increased to 60.03 from 53.95, the higher end of a neutral range and the highest level since February 16thNext resistance is 49.58; next support at 48.58.
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