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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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Listening to Markets
  • U.S. Equity Futures Rebound, but Lower Open Still Indicated 0 comments
    Jul 12, 2011 9:08 AM | about stocks: NLY, CYN, SNV, BOH, CBSH, AA, FNFG, NYCB, PBCT, STT, RF, C, BRKL, SBNY, WTFC, BPFH, PACW, WBS
    This morning.  The past two day’s equity market losses are now pressuring the recent U.S. equity market uptrend.  In Asia, equity markets closed lower on increased volume.  European equity indexes are also lower, but improving on news that the ECB is buying Club Med bonds. Media reports attribute weakness to sovereign debt concerns, now focused on Italy.  U.S. equity futures are lower, but improving from much worse levels earlier in the session. U.S. Treasury prices are higher.  The dollar is stronger.  Commodities markets are lower.  After a fair value adjustment of -3.41 points, September SPX equity futures are at 1311.80, down -3.39 points.  The SPX opens at 1319.49, -3.24% below its recent April 29 multi-year closing high, but +1.44% and +0.23% above its respective 20- and 50-day moving averages.  The SPX is +4.92% above its 1257.64 year-end close.  Next resistance is at 1336.39.  Next support is at 1309.50.
    Monday, U.S. equity markets closed substantially lower on increased volume.  NYSE volume rose +7.56%, but only 0.86x the 50-day moving average.  All market segments also closed at least -1.05% lower, with greater strength in consumer goods, utilities, and telecommunications. Oil and gas, basic materials, and financials lagged.  As on Friday, the day began with weakness in Asia and Europe, and U.S. equity futures indicated a much lower open.  However, after gapping lower, markets failed to stage any sustained rally, trending lower through the day to end just above intraday lows. All major indexes recorded distribution days. The DJI lost least, down -1.20%, while the SPX, Nasdaq, and NYSE composite lost -1.81%, 2.00%, and -2.16%, respectively.  Market breadth was extremely negative and up volume lagged down volume by a wide margin. Volatility spiked, rising intraday to 19.06 in early trading before easing to close at 18.39, up +15.3% from 15.95 at the prior day’s close. Trading desks again reported a quiet day, but with most trading better to the sell-side.
    The past two days’ losses are pressuring the uptrend that began on June 21st.  The distribution day count rose to 4 on the NYSE composite, 3 on the SPX and DJI, and 2 on 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 significantly lower on increased volume. Uptrends in Japan and China are also under pressure. In Japan, the Nikkei fell for the 3rd time in the past 4 trading days, and closed below 10,000 for the 1st time since July 6th. The NKY closed down -1.43% on a +28.6% increase in volume, but ended well above its 50-, 100-, and 200-day moving averages.  The NKY gapped lower to 9950, traded to an intraday low of 9907.80, and ended at 9925.92. 10069.53. Despite the retreat, the NKY is +5.47% since the June 16th correction low.  All market segments closed lower, with utilities, consumer services, and health care the strongest segments. Industrials, oil and gas, and financials were the laggards, with financials ending -1.97% lower. 
    In China, the Hang Seng and Shanghai composite fell -3.06% and -1.72%, respectively.  Volume rose +55.6% and +12.5%, respectively. The SHCOMP is +5.09% above its June 20th correction low.  The SHCOMP gapped lower, and trended lower through the day, ending slightly better than its 2752.19 intraday low. All market segments declined, with stronger performance from utilities, telecommunications, and consumer services. Basic materials, oil and gas, and consumer goods lagged. Financials declined -3.16%. Moody’s identified West China Cement as a company with questionable accounting practices. The SHCOMP ended at 2754.58, -9.90% below its recent April 18th 3057.33 high, -1.91% below its 2010 close, and -0.74% above the 2775.12 50-day moving average.  
    In Europe, equity markets are lower, but rebounding from much lower intraday levels. The EuroStoxx50, FTSE, and DAX are down -0.77%, -1.04%, and -1.22%, respectively.  Equity markets gapped substantially lower, but reversed after in the session’s first hour on news that the ECB was buying Club Med sovereign debt in the open market. The EuroStoxx50 is at 2684.49, compared to its 2608.04 intraday high. All market segments are lower, with financials, oil and gas, and consumer goods the leaders.  Utilities, health care, and consumer services are the laggards.  Financials are down -0.31%, but banks are up +0.64%, rebounding somewhat from recent losses.
    Despite sovereign debt and other macro-concerns, LIBOR levels are near their lowest since early 2009, well below those seen prior to the onset last year of the Eurozone sovereign debt crisis.  Overnight USD LIBOR is at 0.12550%, up from 0.12450% the prior day, and down from 0.25188% at year-end.  USD 3-month LIBOR is at 0.24900%, up from 0.24605% the prior day, but down from 0.30950% at year-end.  The U.S. dollar is stronger against the euro, pound, and yen.  The dollar trades at US$76.365, above its US$74.94 50-day and 75.25 100-day moving averages, but below its 76.97 200-day moving averages.  The euro trades at US$1.3905, compared to US$1.4029 Monday and US$1.4265 the prior day.  The Euro trades below its US$1.4334 50-day moving average and moved today below its US$1.4278 100-day moving average.  The dollar trades at ¥79.55, compared to ¥80.26 Monday and ¥80.64 the prior day.  The yen trades worse than its 50-day moving average ¥80.74.  U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.347% and 2.852%, respectively, compared to 0.355% and 2.919% Monday.  The yield curve narrowed to +2.505%, from +2.564% 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, precious metals, aluminum and copper, and agriculture.
    U.S. news and economic reporting.  Economic reporting picks up with the release of the June NFIB Small Business Optimism report, the May trade balance revision, and the July IBD/TOPP economic optimism report.  The NFIB reported optimism at 90.8, still at recessionary levels. Companies reported substantial political and regulatory uncertainties continue to inhibit hiring plans. U.S. debt sales are substantial this week, with sales of $117 billion in short-term notes and 3-, 10-, and 30-year instruments.  Yesterday evening, earnings season commenced with a 2Q2011 earnings report from Alcoa (NYSE:AA).
    Overseas news:  Today, Italy sold €6.5 billion of 1-year bills at +3.67%, up from +2.15% in last month’s auction but at the top end of the amount targeted.  Today, Italy 10-year bond yields hit 6.0% for the first time since 1997.  Today, the Spanish regional government of Castilla-La Mancha said its budget deficit was more than twice as large as previously thought, increasing fears on the true state of Spain’s regional finances.  Today, press reports indicate Portugal’s four main banks have passed the European Union stress test.  Also today, Spain’s finance minister said some of the country’s banks will fail the test.  In June, U.K.  inflation unexpectedly slowed, increasing +4.2% over the prior year, versus a +4.5% expected increase and a +4.5% increase in May.  Today, the Bank of Japan upgraded its economic assessment for the second straight month. 
     
    Company news/research:
     
    ·         NLY – announced and completed an upsized 120 million share capital raise at $17.70. Pro-forma tangible book value increases to $15.85 from $15.75.
    ·         MTB – Upgraded to Buy at BAC/ML, $100.00 target
    ·         CYN – Upgraded to Neutral at BAC/ML, $55.00 target
    ·         SNV – Upgraded to Neutral at BAC/ML, $2.20 target
    ·         BOH – Downgraded to Underperform at BAC/ML, $45.00 target
    ·         CBSH – Downgraded to Underperform at BAC/ML, $42.00 target
     
    1Q2011 Earnings.  The second quarter’s earnings results began last night with mixed results.  Of the 2 S&P500 companies that reported earnings to date, 50% beat operating EPS estimates, versus the historical average of 62%.  In aggregate, the two companies missed EPS expectations by an average of -0.82% (versus a historical average of +2%).  EPS is up +110.28% over the prior year.  Though challenged in the current operating environment, both companies reported increased revenues over the prior year and 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.  
     
    Banks begin reporting second quarter earnings on Thursday, July 14th with JPMorgan Chase (NYSE: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 13.3x estimated 2011 earnings ($99.27) and 11.7x 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 +4.9%, and +5.2%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.1% and +33.2%, respectively.
     
    Large-cap banks trade at a median 1.43x tangible book value and 12.5x 2011 consensus earnings, compared to 1.43x tangible book value and 12.8x 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.
     
    Monday’s equity markets. On lower volume, equity markets closed substantially lower for a second consecutive day.  The NYSE composite, Nasdaq, SPX, and DJI closed off -2.16%, -2.0%, -1.81%, and –1.20%, respectively.  Futures indicated a substantially lower open that saw no resolution to the U.S. debt ceiling talks and contagion fears that the Eurozone debt crisis may spread to Italy and Spain.  Markets gapped lower and trended slightly lower through the day, with no major news to contain the slide.  Lows for the day were reached in the three o’clock hour, but there was neither panic selling nor signs of capitulation. Though volumes rose, they remained well off 50-day moving averages. A report from Die Welt stated that the Eurozone may have to double its bailout fund to €1.5 trillion Euros, sparking the day’s sell-off.  German Finance Minister Schaeuble dismissed the report.  In the U.S., congressional leaders and president met unsuccessfully to reach debt ceiling accord.
     
    Trading desks were better to the sell side, but were surprised by light order volume and flow was given the market’s weakness.  Most trading was by faster accounts, with most long-only funds on the sidelines.  Most accounts chose to watch this latest macro driven-event ahead of earnings.   Most names that seemed driven by ETFs and futures as opposed to action within individual securities. The VIX finished the day at 18.39, up +15.30%.
     
    Technical indicators are generally negative.  All major averages fell through multiple support levels.  The SPX sold off through primary and secondary support (1334 and 1324) and held above its next support level of 1305.  One technical analyst indicated SPX support in the 1298-1311 range.  Even with the last two days’ selloff, the averages remain above their 50-, 100-, and 200-day moving averages and still higher than their mid-June lows.  The Bloomberg NYSE new net highs were -7 versus Friday’s +28.  The relative strength indicator fell to 49.20 from Friday’s reading of 59.52, now in the neutral range.
     
    Market segments were all negative. Consumer goods, utilities, and telecommunications were the leaders, while oil and gas, basic materials and financials were the laggards.
     
    For a second day, financials were the worst performing segment.  The BKX, XLF, and KRX were each considerably lower, off -2.83%,
    -2.72%, and -2.26%, respectively.  Financials continue to be the focus of U.S. economic concerns.  There was no news specific to the industry, and while few U.S. banks have much direct sovereign debt exposure to Europe, markets are treating them in a fashion similar to the European peers.  The BKX began the day indicated lower.  Once open, the BKX fell through the morning, but received a small bounce during the early afternoon.  That bounce was short-lived as the BKX continued its decline through the late afternoon, seeing its lows for the day near the close.  All 24 names on the BKX were lower.  Leaders included FNFG, NYB and PBCT, though all closed off at least -1.1%. Laggards included STT, RF, and C, each off at least -3.80%. The KRX was much the same, with 49 names lower and 1 unchanged. The sole name unchanged was BRKL, followed by SBNY and WTFC, off -0.05%, and -0.3% respectively. The laggards were BPFH, PACW, and WBS, off -8.16%, -3.89%, and -3.79%, respectively.  The BKX, KRX, and XLF all finished below their respective 50-, 100-, and 200-day moving averages.  While the broader indexes have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -18.95% below its April 2010 high and -43.1% below its best level of 82.55 in September 2008.
     
    NYSE Indicators.  Volume rose +7.56% to 829.43 million shares, from 771.13 million shares Friday, and 0.86x the 974.24 million share 50-day moving average.  Market breadth was negative, and up volume lagged down volume, both by large margins.  Advancing stocks trailed decliners by -2168 (compared to -1202 Friday), or 0.16:1.  Up volume lagged down volume by 0.03:1.
    SPX.  On higher volume, the SPX fell -24.31 points, or -1.81%, to 1319.49.  Volume rose +5.12% to 634.72 million shares, up from 603.82 million shares Friday but below the 748.71 million share 50-day moving average.  For the 180th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1316.44 vs. 1273.32, respectively).  The SPX closed above its 200-week moving average (1161.69).
    The SPX gapped lower at the open to the 1328 level, through first resistance at 1334.  At 9:55, a short rally to 1331.22 set the intra-day high, but through 11:05, the index reversed and fell to 1318.  By 11:35, another brief rebound brought the index back to 1324 and the SPX traded between 1322 and 1324 through 12:45.  The market fell through the afternoon, and at 3:50, set the intra-day low of 1316.42.  The SPX closed on a small rally, but could not retake 1320 before the bell.  
     
    Technical indicators are turning neutral from positive.  The index’s reversal in June’s second half returned markets to an uptrend on June 21st that was confirmed on June 30th.  However, the market’s weakness since Friday July 8th has placed the nascent uptrend under pressure.  For the seventh straight session, the SPX closed above all major moving averages.  The 50-day average crossed below the 100-day moving average for the first time since June 23rd, 2010.  The SPX closed above 1300 for the eighth straight session.  The index closed above its April 2010 highs for the 151st straight session.  The SPX closed (by +1.44%) above its 20-day moving average (1300.77) for the ninth straight session.  The index closed (by +0.23%) above its 50-day moving average for the seventh straight session.  The index closed (by +0.20%) above its 100-day moving average (1316.87) for the seventh straight session.  The SPX closed +3.63% above its 200-day moving average.  The 50-day and 100-day moving averages declined, with the 100-day average switching to a negative from a positive slope for the first time since June 23rd, 2010.  The directional momentum indicator is positive for the eighth straight session, and the trend is moderate and declining.  Relative strength fell to 52.63 from 62.48, a neutral range.  Next resistance is at 1336.39; next support is at 1309.50.
     
    BKX.  On higher volume, the KBW bank index fell -1.37 points, or -2.83%, to 46.97.  Volume rose +21.76% to 68.32 million shares, up from 56.11 million shares Friday but below the 80.18 million share 50-day average.  The BKX closed +9.28% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -18.95% and -15.57% 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 47.72 level, down -1.31% and setting the intra-day high.  Through 11:00, financials continued a steady decline, reaching 47.10.  Momentum reversed through 12:45, and the index climbed back to 47.35.  Unable to maintain positive momentum, bank stocks declined through the afternoon, reaching the intra-day low of 46.84 at 3:50.  A small rebound at the closing bell could not retake the 47.00 level. 
     
    Technical indicators are mostly negative.  Bank stocks significantly underperformed the broader market during the May-June correction.  Recent outperformance during the market’s July rebound has been short-lived as European sovereign debt concerns and returned risk aversion have punished the sector.  The 20-day moving average (47.61) is below the 50- and 100-day moving averages (48.70 and 50.40, 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 below its 20-day moving average for first time in eight sessions.  The index closed below its 50-day moving average for the fourth time in six sessions.  The index closed below the 100- and 200-day moving averages for the 62nd and 28th consecutive sessions, respectively.  The index closed below the 50.00 level for the 27th straight session.  The 50- and 100-day moving averages fell.  The 20-day closed (by -1.10 points) below the 50-day for the 82nd straight day, but the gap narrowed.  The 50-day moving average closed (by -1.35 points) below the 200-day moving average for the 17th straight session, and the gap expanded.  The 100-day moving average closed (by +0.34 points) above the 200-day moving average for the 105th straight session, but the gap narrowed and indicates a cross to the downside this week.  The directional movement indicator switched to negative for the first time in six sessions, and the trend is moderate and declining.  Relative strength decreased to 42.97 from 51.62, a neutral rangeNext resistance is 47.85; next support at 46.47.
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