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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
  • Eurozone Contagion Fears, U.S. Debt Ceiling Doubts Push Futures Lower 0 comments
    Jul 11, 2011 8:59 AM | about stocks: ZION, RF, FNFG, FITB, HBAN, BBT, STBA, FULT, HCBK
    This morning.  U.S. equity markets are in a confirmed uptrend.  In Asia, equity markets closed mixed, on mixed volume.  European equity indexes are lower on renewed sovereign debt concerns, now focused on Italy. Combined with disappointment following Friday’s anaemic June employment report, and still-unsuccessful resolution of U.S. debt ceiling negotiations, U.S. equity futures are under substantial pressure. U.S. Treasury prices are higher.  The dollar is stronger.  Commodities markets are generally lower.  After a fair value adjustment of -2.30 points, September SPX equity futures are at 1324.30, down -15.32 points.  The SPX opens at 1343.80, -1.45% below its recent April 29 multi-year closing high, but +3.50% and +2.20% above its respective 20- and 50-day moving averages.  The SPX is +6.85% above its 1257.64 year-end close.  Next resistance is at 1352.89.  Next support is at 1334.21.
    Friday, U.S. equity markets closed lower, but well off the intraday lows. 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.
    Since the uptrend resumed on June 21st, the distribution day count is 3 on the NYSE composite, and 2 on the SPX and DJI, and 1 on the Nasdaq.  The BKX has 4 distribution days.  Distribution days signal institutional selling in the prior 25 trading days, or since the commencement of the most recent uptrend.
    Asian equity markets closed mixed.  In Japan, the Nikkei fell for the 2nd time in the past 10 trading days, down -0.67% on a -17.3% decline in volume, but closing well above its 50-, 100-, and 200-day moving averages.  News reports attributed the decline to disappointing U.S. employment, increased Australian carbon taxes, and Eurozone sovereign debt concerns. The NKY gapped immediately lower to its intraday lows, rallied, and then retested the intraday low an additional 3 times, rallying modestly into the close. The NKY closed at 10069.53, up +6.99% since the June 16th correction low and its 4th consecutive close above 10,000.  Consumer services, utilities, and oil and gas closed higher. Industrials, telecommunications, and technology were the laggards. Financials fell -0.87%.  In China, the Hang Seng fell -1.67% and the Shanghai composite rose +0.18%, respectively.  HSI volume rose +6.99%, and SHCOMP volume fell -0.23%.  The SHCOMP is  +6.92% above its June 20th correction low. 
    The SHCOMP staged an intraday reversal, gapping to an intraday low of 2780.67 in the first hour, before rallying to gains before noon and closing near the intraday high of 2807.32. Consumer goods, health care, and consumer services were the segment leaders. Oil and gas, basic materials, and financials were the laggards. The SHCOMP ended at 2802.69, -8.33% below its recent April 18th 3057.33 high, -0.19% below its 2010 close, and +0.93% above the 2776.81 50-day moving average.  
    In Europe, equity markets are lower, as the contagion debate continues.  The EuroStoxx50, FTSE, and DAX are down -2.42%, -1.19%, and -1.87%, respectively.  Equity markets opened lower and have trended lower through the morning trade. All market segments are lower, with technology, industrials, and consumer goods are the leaders. Telecommunications, consumer services, and financials are the laggards.  Financials are down -3.89%.
    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 stronger against the euro and pound, and slightly weaker compared to the yen.  The dollar trades above its US$74.8689 50-day moving average, but below its respective 75.26 and 76.97 100- and 200-day moving averages.  The euro trades at US$1.4067, compared to US$1.4265 Friday and US$1.4364 the prior day.  The Euro trades below its US$1.4353 50-day moving average.  The dollar trades at ¥80.60, compared to ¥80.64 Friday and ¥81.25 the prior day.  The yen trades worse than its 50-day moving average ¥80.81.  U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.359% and 2.952%, respectively, compared to 0.391% and 3.027% Friday.  The yield curve narrowed to +2.593%, from +2.636% 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 lower, with lower energy, mixed precious metals, lower aluminum and copper, and lower agriculture.
    U.S. news and economic reporting.  Economic reporting picks up tomorrow with the release of the June NFIB Small Business Optimism report, the May trade balance revision, and the July IBD/TOPP economic optimism report. U.S. debt sales are substantial this week, with sales of $117 billion in short-term notes and 3-, 10-, and 30-year instruments. Earnings season commences after today’s close when Alcoa reports in 2Q2011 earnings.
    Overseas news:  Today, European finance officials held an emergency meeting to discuss the Greek sovereign debt situation and market pressures on Italy’s finances.  Today, Italian 10-year yields rose 27 basis points to +5.54%, a 9-year record, while credit default swaps hit a record of 279 basis points.  With a selective Greek debt default appearing impossible to avoid, today’s press reports indicate Eurozone discussions now focus on reducing Greece’s overall debt burden.  Today, a Russian central bank official rejected any plans to buy Spanish sovereign debt.  In June, China’s consumer price index rose +6.4% over the prior year, ahead of +6.2% consensus estimates and compared to May’s +5.5% increase.
     
    Company news/research:
     
    ·         None.
     
    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 reporting second quarter earnings 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 13.5x estimated 2011 earnings ($99.34) and 11.9x estimated 2012 earnings ($112.91), compared to 13.6x and 12.0x 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 +5.0%, 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 1.43x tangible book value and 12.8x 2011 consensus earnings, compared to 1.42x 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 +31.9% and +68.2%, respectively.
     
    Friday’s equity markets. On lighter volume, the equity markets closed with moderate losses, that were substantially above their intraday lows. The NYSE, SPX , DJI, and Nasdaq closed off -0.78%, -0.70%, -0.49%, and -0.40%, respectively.  The Nasdaq’s loss ended an 8-day winning streak. Prior to the markets opening, the Bureau of Labor released an extremely disappointing June non-farm payrolls and unemployment report.  The disappointment was more acute after the much better than expected ADP report the prior day had greatly raised expectations. SPX futures immediately weakened, and markets opened substantially lower and continued to fall through most of the morning session. Markets began to recover after 11:30, rallying modestly but steadily through the close to halve the day’s losses. 
     
    Trading desks reported that many large investors took advantage of the pullback to buy shares. Trades were overwhelmingly better to buy (4 to 1 on one desk), but that investors were not chasing prices.  Money remains on the sidelines ready to go to work. The VIX finished the day at 15.95, unchanged from the previous session.
     
    Technical indicators are generally positive.  Despite the morning’s sharp decline, the SPX only broke through primary support at 1343 and while it tested next support at 1332, but did not pierce that level. Other indexes broke through multiple support levels, but on lighter volume. The major indexes all finished above their 50-, 100-, and 200-day moving averages.  The Bloomberg NYSE new net highs were +28 versus Thursday’s +271.  The relative strength indicator finished lower at 59.52 versus Thursday’s 64.05, in the high end of a neutral range.
     
    Market segments were all negative. Consumer goods, telecommunications, and health care were the leaders, while basic materials, industrials, and financials were the laggards.
     
    Financials were the worst performing sector. The BKX, KRX and XLF all finished lower, off -1.59%, -1.52%, and -1.28%, respectively. The indexes gave back all Thursday’s gains. The BKX began the day lower and fell through the morning.  The BKX received a lift at 11:30 and gained minimally through mid-day. The index sold off through the late afternoon, but reversed course in the last half hour, finishing almost exactly on the day’s average.  The BKX finished with all 24 names lower.  Leaders in the BKX were ZION (-.25%), RF (-.32%), and FNFG (-.37%). The laggards were FITB (-2.64%), HBAN (-3.12%) and BBT (-3.33%).  RF was the speculation of takeout talks involving Mitsubishi’s Union Bank of California.  The name received a short-live support that quickly dissipated. The KRX finished with 1 name higher, 48 lower and 1 unchanged.  The laggards in the index were STBA, FULT, and HCBK, each off at least -2.93%. The BKX and XLF finished below their 50-, 100-, and 200-day moving averages. The KRX finished higher than its 50- and 200-day, but because the moving averages are inverted, lower than the 100-day moving average. While the broader indexes have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -16.58% below its April 2010 high and -41.44% below its best level of 82.55 in September 2008.
     
    NYSE Indicators.  Volume fell -8.57% to 771.13 million shares, from 843.37 million shares Thursday, and 0.79x the 971.23 million share 50-day moving average.  Market breadth was negative, and up volume lagged down volume.  Advancing stocks trailed decliners by -1202 (compared to +1724 Thursday), or 0.42:1.  Up volume lagged down volume by 0.21:1.
    SPX.  On lower volume, the SPX fell -9.42 points, or -0.70%, to 1343.80.  Volume fell -6.80% to 603.82 million shares, down from 647.87 million shares Thursday and below the 751.36 million share 50-day moving average.  For the 179th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1317.26 vs. 1272.34, respectively).  The SPX closed above its 200-week moving average (1162.51).
    The SPX gapped lower at the open to the 1340 level, through first resistance at 1343.  Through 11:15, the index continued falling and set the intra-day low of 1333.71 at 11:15.  Finding some support at 1335, the index rebounded to the 1340 level again by 1:30.  Through 3:30, the SPX fluctuated at 1340 before a closing bell rally lifted the index to the 1343 level at the bell, near the day’s high.   
     
    Technical indicators are mostly positive.  The index’s reversal in June’s second half returned markets to an uptrend on June 21st that was confirmed on June 30th.  For the sixth 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 but may cross to the downside this week.  The SPX closed above 1300 for the seventh straight session.  The index closed above its April 2010 highs for the 150th straight session.  The SPX closed (by +3.50%) above its 20-day moving average (1298.34) for the eighth straight session.  The index closed (by +2.02%) above its 50-day moving average for the sixth straight session.  The index closed (by +2.04%) above its 100-day moving average (1316.96) for the sixth straight session.  The SPX closed +5.62% above its 200-day moving average.  The 50-day moving average declined.  The directional momentum indicator is positive for the seventh straight session, and the trend is moderate and stable.  Relative strength fell to 62.48 from 67.00, the higher end of a neutral range.  Next resistance is at 1352.89; next support is at 1334.21.
     
    BKX.  On higher volume, the KBW bank index fell -0.78 points, or -1.59%, to 48.34.  Volume rose +1.19% to 56.11 million shares, up from 55.45 million shares Thursday but below the 81.22 million share 50-day average.  The BKX closed +12.47% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -16.58% and -13.10% below its April 23, 2010, and February 14, 2011 closing highs, respectively. 
     
    Financials were the market’s worst performing sector, and large-cap banks underperformed regionals.  The BKX gapped lower at the open to the 48.50 level, below first resistance at 48.73.  The intra-day high of 48.55 came within trading’s first minute.  Like the broader markets, the index declined through 11:15, setting the intra-day low then of 48.14.  By 11:45, the BKX climbed back to the 48.40 level and nearly retook 48.50 at 1:30.  Unable to maintain positive momentum, the index was sold back to the 48.20 level by 3:30.  A small rebound into the bell closed the index at 48.34, in the middle of the day’s range. 
     
    Technical indicators are mostly negative.  Bank stocks significantly underperformed the broader market during the recent correction but have led other sectors during the market’s recent rebound.  The 20-day moving average (47.60) is below the 50- and 100-day moving averages (48.80 and 50.48, 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 seventh straight session.  The index closed below its 50-day moving average for the third time in five sessions.  The index closed below the 100- and 200-day moving averages for the 61st and 27th consecutive sessions, respectively.  The index closed below the 50.00 level for the 26th straight session.  The 50- and 100-day moving averages fell.  The 20-day closed (by -1.20 points) below the 50-day for the 81st straight day, but the gap narrowed.  The 50-day moving average closed (by -1.25 points) below the 200-day moving average for the 16th straight session, and the gap expanded.  The 100-day moving average closed (by +0.43 points) above the 200-day moving average for the 104th straight session, but the gap narrowed and indicates a cross to the downside this week.  The directional movement indicator is positive for the fifth consecutive session, and the trend is strong and declining.  Relative strength decreased to 51.62 from 57.77, a neutral rangeNext resistance is 48.77; next support at 48.02.
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