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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
  • Improved Employment Reports Push US Equity Futures Higher 0 comments
    Jul 7, 2011 8:53 AM | about stocks: COF, PNC, FITB, BAC, RF, STT, FNFG, NYCB, HCBK, PVTB, COLB, SBNY, SBIB, FHN
    This morning.  U.S. equity markets are in a confirmed uptrend, but indexes are again near resistance levels that proved difficult last April before the recent correction. Asian markets have also confirmed an uptrend, but closed mixed, and the SHCOMP recorded a distribution day. In Europe, equity indexes are mixed, but mostly higher. The Bank of England left its benchmark rate unchanged. The ECB increased its benchmark rate to 1.5%, up 25 bps, with a follow-on conference call at 8:30.  After today’s better than expected June ADP report, U.S. Treasury prices are lower.  The dollar is stronger.  Commodities markets are mixed, but strengthening.  After a fair value adjustment of -0.98 points, September SPX equity futures are at 1346.00, up +10.98 points.  The SPX opens at 1339.22, -1.79% below its recent April 29 multi-year closing high, but +3.66% and +1.66% above its respective 20- and 50-day moving averages.  The SPX is +6.49% above its 1257.64 year-end close.  Next resistance is at 1343.13.  Next support is at 1333.11.
    Wednesday, U.S. equity markets closed mostly higher, after Tuesday’s mixed trade. Market segments also closed mixed, with greater strength in industrials, technology, and consumer goods. Oil and gas, financials, and telecommunications lagged. The day began with weakness in Asia and Europe, with U.S. equity futures indicating a moderately lower open. After an initial sell-off, however, markets staged a modest reversal, led by the DJI and Nasdaq, which closed up +0.45% and +0.29%, respectively. The SPX reversed as well, but struggled to hold gains through the afternoon, and finally concluded with a slender +0.10% gain. The NYSE composite closed off -0.10%. Market breadth was positive. Volatility rose modestly, spiking after the open to an intraday high of 17.08, but easing through the rest of the session to end at 16.34, up +2.96%, but just 2 bps above the intraday low. NYSE volume declined -9.47% to 0.84x the 50-day moving average.  Trading desks again reported a quiet day, with little conviction ahead of this week’s employment reports.
    With the uptrend’s resumption, the distribution day count reset to zero.  Volume increased on the DJI and Nasdaq, but declined on the SPX and NYSE composite.  The BKX posted its first distribution day of the uptrend, with a -0.68% decline on a +3.67% increase in volume.  Distribution days signal institutional selling in the prior 25 trading days.
    Asian equity markets closed mixed.  In Japan, equities declined for the first time in the past 8 trading days, with the weakness attributed to reports that stress tests of its nuclear utilities would take longer than expected to complete. The Nikkei closed down -0.11% on a -3.62% decrease in volume.  The NKY closed at 10071.14, up +7.66% since the June 20th correction low and its 2nd consecutive close above 10,000.  Oil and gas, technology, and consumer services were the segment leaders. Financials, telecommunications, and utilities were the laggards. Financials fell -0.65%.  The Hang Seng rose +0.06%, while the Shanghai composite fell -0.58%.  Volume fell on the Hang Seng, but rose +13.5% on the SHCOMP.  The SHCOMP has rallied +6.60% from its June 20th correction low.  The SHCOMP gapped lower, and trended lower through mid-afternoon, but rallied strongly into the close to end near the intraday high.  Consumer services, technology, and health care closed higher. All other segments closed lower, with basic materials, oil and gas, and telecommunications the laggards.  Financials closed off -0.66%.  The SHCOMP ended at 2794.27, -8.60% below its recent April 18th 3057.33 high, -0.49% below its 2010 close, and +0.43% above the 2782.25 50-day moving average.  In Europe, markets are lower in response to the Portugal sovereign debt downgrade and increase in Chinese interest rates.  The EuroStoxx50, FTSE, and DAX are up +0.89%, +0.75%, and +0.72%, respectively. Equity markets opened higher, but lost ground in early trading, but rallied strongly following the BOE and ECB rate decisions and better than expected U.S. employment reports. Market segments are all higher, led by technology, consumer goods, and health care. Financials, technology, and industrials lag, but are at least +0.42% higher. Financials are up +0.71%.
    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 is at 0.12450%, unchanged from 0.12500% the prior day, and down from 0.25188% at year-end.  USD 3-month LIBOR rose to 0.24605%, from 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 74.77 50-day moving average, but well below its respective 75.31 and 77.00 100- and 200-day moving averages.  The euro trades at US$1.4277, compared to US$1.4319 Wednesday and US$1.4429 the prior day.  The Euro trades above its US$1.4377 50-day moving average.  The dollar trades at ¥81.02, compared to ¥81.91 Wednesday and ¥81.07 the prior day.  The yen trades worse than its 50-day moving average ¥80.83.  U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.427% and 3.122%, respectively, compared to 0.423% and 3.108% Wednesday.  The yield curve widened to +2.695%, from +2.685% 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 mixed, with higher energy, but lower precious metals, aluminum and copper, and mixed agriculture.
    U.S. news and economic reporting.  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. The ADP report surprised to the upside with an acceleration to 157K jobs, compared to 70K survey and 38K in May. Initial weekly jobless claims were 418K, slightly better than 420K survey and 428K prior.
    Overseas news.  Today, the Bank of England maintained its benchmark interest rate at 0.50%.  Today, the European Central Bank increased its benchmark interest rate by 25 basis points to 1.50%.  Today, Spain sold €3 billion of 3- and 5-year debt, at the top end of the targeted range for the auction. 
    Company news/research:
    ·         COF – upgraded to buy at KBW, price target of $62
    ·         PNC – downgraded to hold at Deutsche Bank, price target reduced to $64 from $73
     
    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 ($99.37) and 11.9x estimated 2012 earnings ($112.91), compared to 13.4x and 11.8x 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 +5.2%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.2% and +33.2%, respectively.
     
    Large-cap banks trade at a median 1.44x tangible book value and 12.8x 2011 consensus earnings, compared to 1.44x tangible book value and 12.7x 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 +31.9% and +68.2%, respectively.
     
    Wednesday’s equity markets. On mixed volume, the equity markets closed mixed. The DJI, Nasdaq, and SPX all gained, up +0.45%, +0.29%, and +0.10%, while the NYSE fell, off -0.10%. Volume was stronger on the Nasdaq and DJI, but weaker than the previous day’s volume on the SPX and NYSE. The markets began the day indicated lower after China’s central bank said it will raise its benchmark deposit and lending rates by 25 basis points. This marks the third time this year China has raised rates as is tries to cool the world’s fastest growing economy.  We also learned that planned job cuts in the U.S. had grown in June by 5.3%, year over year according to the Challenger, Gray jobs report. The markets opened the door lower and fell further at 10:00 when the ISM Non-Manufacturing Composite Index was reported lower than anticipated at 53.3 versus expectations of 53.7, but still showing growth. Interestingly, the markets saw their lows for the day shortly before 10:30, and then began to reverse direction. The SPX turned first and became positive just before 11:00. The DJI, which had fallen further, turned positive just before 12:00. The markets, overall, staged a very shallow reversal as investors dismissed the small misses in our economic data and used the opportunity to buy stocks. The DJI never looked back and was built on the positive gains through the early afternoon, flattening out in the late afternoon. The SPX wrestled between gains and losses for the balance of the day, before finally lifting in the last half hour and finishing with a gain. Trading desks report a very quiet day overall, with a lack of leadership in any one group and , perhaps, some of the larger investors still missing from the 4th of July holiday. The VIX finished the day at 16.34, up +1.74%.
     
    Technical indicators were mixed. The DJI, which had earlier in the day tested support, broke through multiple levels of resistance later in the day, breaking through 12,600 and 12,631. The SPX traded in a relatively tight range breaking support early in the session, but not quite breaking resistance at 1341, with a high trade of 1340.94. The AAII Investor Sentiment Bullish reading was 41.77 for the week ending July7th versus the previous reading of 38.31 (week ended June 30th). The Investment Company Institute reported outflow for a 6th consecutive week in domestic equity funds, with funds losing -$2.238mm. The Bloomberg NYSE new net highs for Wednesday were +150 versus Tuesday’s reading of +162. The relative strength indicator fell to 60.69 Wednesday from 61.23 on Tuesday, but remains in the high end of a neutral range.
     
    Market segments were mixed. Industrials, technology, and consumer goods were the leaders, while oil and gas, financials and telecommunications were the laggards.
     
    Financials were mixed. The KRX was up +0.48%, while the BKX and XLF  were both lower, off -0.68% and -0.52%, respectively.  The BKX began the day lower and bounced through its lows through the morning session. It recovered somewhat in the afternoon, but overall traded in a tight, flattish pattern throughout the day. The BKX finished the day with 9 names higher and 15 lower. Leaders included FNFG (+2.36%), STT (+2.04%), and NYB (+1.11%), while FITB, BAC, and RF were the laggards. The KRX finished the day with 39 names higher and 11 lower. Leaders included HCBK, PVTB, and COLB. The laggards were SBNY, SBIB, and FHN.  Early in the day, a newspaper indicated a possible comprehensive settlement involving the large mortgage servicers and banks might be reached for $60 billion dollars. This figure was significantly higher than the $20 billion dollar that had been discussed. This weighed on the banks through most of the day. Late in the day Bloomberg reported that the $60 billion number may be inaccurate and include actions, activities, and fines already incurred or paid by the banks. The BKX and XLF finished below their 50-, 100-, and 200-day moving averages. The KRX finished above its 50- and 200-day moving averages, but due to the averages being inverted, below its 100-day moving average. While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -16.61% below its April 2010 high and -41.15% below its best level of 82.55 in September 2008.
     
    NYSE Indicators.  Volume declined -9.47% to 821.05 million shares, from 906.95 million shares Tuesday, and 0.84x the 976.34 million share 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +377 (compared to -39 Tuesday), or 1.29:1.  Up volume lagged down volume by 1.07:1.
    SPX.  On lower volume, the SPX rose+1.34 points, or +0.10%, to 1339.22.  Volume fell -9.20% to 615.47 million shares, down from 677.83 million shares Tuesday and below the 756.70 million share 50-day moving average.  For the 177th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1317.37 vs. 1270.22, respectively).  The SPX closed above its 200-week moving average (1162.49).
    The SPX opened lower to the 1334 level.  Through 10:22, the index continued falling and set its intra-day low of 1330.92.  Momentum reversed, and through 1:00, the SPX rallied consistently.  At 11:40, the index retook its break-even line at 1338 and at 1:00, the SPX set the intra-day high of 1340.94.  The index failed to cross first-level resistance at 1341, and gains retraced back to break-even by 1:30.  The index fluctuated between gains and losses through the day’s end, but finished on a small rally to close with modest gains.   
     
    Technical indicators are positive.  The index’s reversal in June’s second half returned markets to a confirmed uptrend on July 1st.  For the fourth straight session, the SPX closed above all major moving averages.  The 50-day average remains above the 100-day moving average by a narrow margin as the 50-day average resumed its uptrend last Tuesday.  The SPX closed above 1300 for the fifth straight session.  The index closed above its April 2010 highs for the 148th straight session.  The SPX closed (by +3.66%) above its 20-day moving average (1291.92) for the sixth straight session.  The index closed (by +1.66%) above its 50-day moving average for the fourth straight session.  The index closed (by +1.72%) above its 100-day moving average (1316.60) for the fourth straight session.  The SPX closed +5.43% above its 200-day moving average.  All moving averages increased.  The directional momentum indicator is positive for the fifth straight session, and the trend is moderate and stable.  Relative strength rose to 63.34 from 62.98, the higher end of a neutral range.  Next resistance is at 1343.13; next support is at 1333.11.
     
    BKX.  On higher volume, the KBW bank index fell -0.33 points, or -0.68%, to 48.32.  Volume rose +12.96% to 67.22 million shares, up from 59.51 million shares Tuesday but below the 83.48 million share 50-day average.  The BKX closed +12.42% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -16.62% and -13.14% below its April 23, 2010, and February 14, 2011 closing highs, respectively. 
     
    Financials losses underperformed the market’s gains, and large-cap banks’ lossesunderperformed regionals’ gains.  The BKX opened lower to the 48.40 level, immediately setting the intra-day high.  Through 10:00, financials continued dropping, and set the intra-day low of 47.92 on a sharp move lower at 10:00.  The index quickly retook the 48.00 level, which served as healthy support through the morning.  At 11:30, a sharp rally lifted the BKX 0.50% to the 48.25 level, and by 1:00, the index reached 48.30.  The BKX fluctuated above and below the 48.30 level through the day’s end, and closed just above that threshold. 
     
    Technical indicators are mostly negative.  While bank stocks significantly underperformed the broader market during the recent correction, they have led other sectors during the market’s recent rebound.  The 20-day moving average (47.39) is below the 50- and 100-day moving averages (48.90 and 50.61, respectively).  The 50-day average is below the 100-day moving average and has been below the 200-day moving average since June 16th.  The index closed above its 20-day moving average for fifth straight session.  After one brief close above the 50-day moving average on July 1st, the BKX closed below the 50-day average for the second consecutive session.  The index closed below the 100- and 200-day moving averages for the 59th and 25th consecutive sessions, respectively.  The index closed below the 50.00 level for the 24th straight session.  The 50- and 100-day moving averages fell.  The 20-day closed (by -1.51 points) below the 50-day for the 79th straight day, but the gap narrowed.  The 50-day moving average closed (by -1.13 points) below the 200-day moving average for the 14th straight session, and the gap expanded.  The 100-day moving average closed (by +0.59 points) above the 200-day moving average for the 102nd straight session, but the gap narrowed.  The directional movement indicator is positive for the third consecutive session, and the trend is strong and declining.  Relative strength decreased to 52.37 from 55.07, a neutral rangeNext resistance is 48.56; next support at 48.00.
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