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Gary Townsend
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Gary Townsend - Founding partner 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. June Employment Report Contradicts ADP, Futures Move Lower 0 comments
    Jul 8, 2011 9:08 AM | about stocks: ZION, BBT, JPM, WFC, AXP, C, HBAN, RF, CMA, CBSH, PBCT, CFR, MBFI, PFS, SNV, FULT, FNB, BXS, JNS, PLD, LM
    This morning.  U.S. equity markets are in a confirmed uptrend. In Asia, equity markets closed higher. European equity indexes are mixed.  After today’s disappointing June employment report, U.S. Treasury prices are lower.  The dollar is stronger.  Commodities markets are generally higher.  After a fair value adjustment of -2.78 points, September SPX equity futures are at 1331.30, down -17.42 points.  The SPX opens at 1353.22, -0.76% below its recent April 29 multi-year closing high, but +4.45% and +2.71% above its respective 20- and 50-day moving averages.  The SPX is +7.60% above its 1257.64 year-end close.  Next resistance is at 1359.93.  Next support is at 1343.07.
    The The current equity uptrend began on June 21st, when the Nasdaq rose +2.19% on an 8.30% increase in volume. Markets confirmed the uptrend 7 trading days later, on June 30th, when all major indexes advances more than +1.0% on increased volume. Perhaps not so coincidentally, Asian markets also moved into uptrend on June 21st, subsequently confirmed on June 24th, when the SHCOMP rose +2.16% on a +70.8% increase in volume. The subsequent distribution day count is 3 on the NYSE composite, and 2 on the SPX. The BKX has 3 distribution days. Distribution days signal institutional selling in the prior 25 trading days, or since the commencement of the most recent uptrend.
    Thursday, 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.
    Asian equity markets closed higher.  In Japan, the Nikkei rose for the 8th time in the past 9 trading days, up +0.66% on a -4.51% decline in volume, but closing above its 50-, 100-, and 200-day moving averages. News reports attributed the advance to better U.S. employment and retail sales data, but the pace of the Japanese economy has obviously quickened since the months following the February earthquake. The NKY gapped substantially higher to an intraday high of 10205.70, but trended lower through the day. The NKY closed at 10137.73, up +8.37% since the June 20th correction low and its 3rd consecutive close above 10,000.  Oil and gas, consumer services, and technology were the leading segments. Financials, health care, and telecommunications were the laggards. Financials rose +0.35%.  In China, the Hang Seng and Shanghai composite rose +0.87% and +0.13%, respectively. Traders attributed the gains to an improved U.S. economic outlook. Volume fell -3.38% and -26.0% on the respective exchanges. The SHCOMP has rallied +6.73% from its June 20th correction low.  The SHCOMP rose modestly at the open, and also trended lower through the day, but rallied into the close. Financials, telecommunications, and basic materials led other market segments. Consumer goods, health care, and oil and gas were the laggards.  Financials rose +0.65%.  The SHCOMP ended at 2797.77, -8.49% below its recent April 18th 3057.33 high, -0.37% below its 2010 close, and +0.66% above the 2782.25 50-day moving average.  In Europe, markets are mixed, as the contagion debate continues. The EuroStoxx50, FTSE, and DAX are mixed, +0.00%, +0.39%, and +0.61%, respectively.  Equity markets opened higher, but subsequently lost ground before staging a mild rally in front of the U.S. June employment report. Market segments are mixed, led by health care, basic materials, and consumer goods. Consumer services, financials, and utilities are the laggards. Financials are down -0.66%.
    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 0.12450% the prior day, and down from 0.25188% at year-end.  USD 3-month LIBOR is at 0.24605%, unchanged from 0.24605% 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 above its 74.81 50-day moving average, but below its respective 75.28 and 76.98 100- and 200-day moving averages.  The euro trades at US$1.4252, compared to US$1.4364 Thursday and US$1.4419 the prior day.  The Euro trades below its US$1.4368 50-day moving average.  The dollar trades at ¥81.39, compared to ¥81.25 Thursday and ¥80.91 the prior day.  The yen trades worse than its 50-day moving average ¥80.84.  U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.475% and 3.151%, respectively, compared to 0.468% and 3.138% Thursday.  The yield curve narrowed to +2.676%, from +2.670% 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 mixed energy, lower precious metals, higher aluminum and copper, and mixed agriculture.
    U.S. news and economic reporting.  Friday’s reporting focuses on the June change in non-farm payrolls, of particular importance given the poor May reading. Survey expects a 105K gain in non-farm payrolls and a 132K gain in private payrolls. The unemployment rate is expected to remain steady at 9.1%. Actual non-farm and private payrolls gained a disappointing 18K and 57K, respectively. The unemployment rate rose to 9.2% from 9.1%. Also, at 10:00, the Commerce Department releases May wholesale inventories.
    Overseas news:  Next Friday, Eurozone officials will publish their bank stress test results.   In June, U.K. purchase price index increased +5.7% over the prior year, the fastest annual rate since October.
    Company news/research:
    ·         ZION – upgraded to buy at Nomura, price target raised to $28 from $25
    ·         BBT – downgraded to sell at Nomura, price target cut to $26 from $27
    ·         JPM, WFC, AXP, EWBC: top picks into 2Q earnings at Goldman
    ·         C – top money-center bank pick into 2Q earnings at Sandler O’Neill
    1Q2011 Earnings.  Second quarter earnings reporting begins on Monday July 11th with Alcoa (AA).  For the second quarter of 2011, analysts estimate the SPX will earn $24.18 per share, compared to $23.06 and $21.17 per share in 1Q11 and 2Q10, a +4.9% and +14.2% increase, respectively.  
    Banks begin second quarter earnings reporting on Thursday, July 14th with JPMorgan Chase (JPM).  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 13.6x estimated 2011 earnings ($99.37) and 12.0x estimated 2012 earnings ($112.91), compared to 13.5x and 11.9x 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 1.42x tangible book value and 12.4x 2011 consensus earnings, compared to 1.44x tangible book value and 12.8x 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 +31.8% and +68.2%, respectively.
    Thursday’s equity markets.  On stronger volume, equity markets finished higher. The Nasdaq, SPX, NYSE, and DJI closed higher, up +1.36%, +1.05%, +0.95%, and +0.74%, respectively.  Volume on the DJI increased +16.2%, while the Nasdaq and SPX saw increases of more than 5%.  Futures showed strength following ECB interest rate action and a surprisingly strong ADP June private payrolls report. Initial jobless claims also mildly surprised.  Markets opened with strength and continued a ground upward through the morning and into the early afternoon.  Just after 2:00, the markets lost momentum gave back a portion of its gains on profit taking into the close. Trading desks reported an active opening with fast money setting the pace.  Large institutional players remained on the sidelines for the most part, afraid to chase the past 2 weeks’ move.  Many remain frustrated by the rapidity and strength of the recent move and how poorly positioned they were to take advantage.  After slumping as much as -7.2% from the end of April through June 15th amid international and domestic economic concerns, the SPX has trimmed its loss since April 29th to less than -0.8%.  The VIX finished the day at 15.95, off -2.39%, but started the day at 15.30 and trended higher through the day.
    Technical indicators are generally positive.  All the major averages broke through multiple resistance levels.  The SPX broke through two levels of resistance within the minutes of the open and was within a half point of the breaking through a third in the late afternoon.  The upward move of the last two weeks has seen the SPX reverse course from twice testing the 200-day moving average to within 1.24% of the 52-week high set on May 2nd.  All the major indices are above their 50-, 100-, and 200-day moving averages.  The Bloomberg NYSE new net highs were +271 versus Wednesday’s reading of +150. The relative strength indicator rose to 64.05 from Wednesday’s reading of 60.69, and is in the high end of a neutral range.
    Market segments were mixed. Basic materials, financials, and technology were the leaders, while utilities, telecommunications, and health care were the laggards.
    Financials was one of the strongest sectors.  The BKX, XLF, and KRX were all higher, up +1.66%, +1.62%, and +1.43%, respectively.  The BKX was higher from the open on the strength of the economic data and continued higher over the first two hours of trading.  The afternoon was marked with new highs and gentle retracements. In the last hour of the day we sold slightly and included a small rebound in that sell off to finish at 49.12.  The BKX had all 24 names higher. Leaders included HBAN (+3.06%), RF (+2.49%), and CMA (+2.30%).  The laggards were CBSH, PBCT and CFR.  The KRX finished with 49 names higher and one name unchanged. Leaders included MBFI, PFS, and SNV, while the laggards were FULT, FNB, and BXS.  Among broader financials, JNS (+5.86%), PLD (+3.50%), and LM (+3.29%) were the leaders.  The BKX and XLF finished above their 50-day moving average, but do to the moving averages being inverted, below their 100- and 200-day moving average. The KRX finished above all the major averages. While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -15.24% below its April 2010 high and -40.50% below its best level of 82.55 in September 2008.
    NYSE Indicators.  Volume rose +2.72% to 843.37 million shares, from 821.05 million shares Wednesday, and 0.87x the 975.02 million share 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +1724 (compared to +377 Wednesday), or 3.67:1.  Up volume led down volume by 4.87:1.
    SPX.  On higher volume, the SPX rose +14.00 points, or +1.05%, to 1353.22.  Volume rose +5.26% to 647.87 million shares, up from 615.47 million shares Wednesday but below the 754.31 million share 50-day moving average.  For the 178th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1317.49 vs. 1271.29, respectively).  The SPX closed above its 200-week moving average (1162.56).
    The SPX gapped higher at the open to the 1349 level.  Through 10:30, the index tested 1350.  At 10:45, a brief move to the 1352 level was sold back to 1350 by 11:45.  At noon, the SPX began a rally that lasted through 2:30, taking the index up to the intra-day high of 1356.48 at 2:33.  Stocks traded sideways through 3:20, sold off slightly into the close, but finished above 1353.
    Technical indicators are positive.  The index’s reversal in June’s second half returned markets to an uptrend on June 21st and confirmed on June 30th.  For the fifth 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.  The SPX closed above 1300 for the sixth straight session.  The index closed above its April 2010 highs for the 149th straight session.  The SPX closed (by +4.45%) above its 20-day moving average (1295.60) for the seventh straight session.  The index closed (by +2.71%) above its 50-day moving average for the fifth straight session.  The index closed (by +2.76%) above its 100-day moving average (1316.84) for the fifth straight session.  The SPX closed +6.44% above its 200-day moving average.  All moving averages increased.  The directional momentum indicator is positive for the sixth straight session, and the trend is moderate and increasing.  Relative strength rose to 67.00 from 63.34, the higher end of a neutral range.  Next resistance is at 1359.93; next support is at 1343.07.
    BKX.  On lower volume, the KBW bank index rose 0.80 points, or +1.66%, to 49.12.  Volume fell -17.52% to 55.45 million shares, down from 67.22 million shares Wednesday and below the 82.13 million share 50-day average.  The BKX closed +14.29% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -15.24% and -11.70% below its April 23, 2010, and February 14, 2011 closing highs, respectively. 
     Financials outperformed the market, and large-cap banks outperformed regionals.  The BKX gapped higher at the open to 48.88, up +1.15% and immediately setting the intra-day low.  Through 10:00, financials continued rallying sharply and set the intra-day high of 49.35, up +2.13%, at 10:03.  By 11:30, gains retraced back to the 49.10 level.  A 11:30 rally took the index back to 49.30 by 12:30.  Through 1:30, the index made multiple failed attempts to break through 49.30.  Unable to move higher, the index consolidated gains through the close and retraced to the 49.10 level at the bell.   
    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 (47.53) is below the 50- and 100-day moving averages (48.86 and 50.55, 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 sixth straight session.  The index closed above its 50-day moving average for the second time in four sessions.  The index closed below the 100- and 200-day moving averages for the 60th and 26th consecutive sessions, respectively.  The index closed below the 50.00 level for the 25th straight session.  The 50- and 100-day moving averages fell.  The 20-day closed (by -1.33 points) below the 50-day for the 80th straight day, but the gap narrowed.  The 50-day moving average closed (by -1.18 points) below the 200-day moving average for the 15th straight session, and the gap expanded.  The 100-day moving average closed (by +0.51 points) above the 200-day moving average for the 103rd  straight session, but the gap narrowed.  The directional movement indicator is positive for the fourth consecutive session, and the trend is strong and declining.  Relative strength increased to 57.77 from 52.37, a neutral range.  Next resistance is 49.42; next support at 48.74.
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