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Gary Townsend - Since 2007, a founding partner, CEO and Portfolio Manager of Hill-Townsend Capital LLC, a long/short equity financial sector fund based in Chevy Chase, Maryland. Mr. Townsend has 30 years banking, regulatory, and investment experience. He started his business career in 1978, as... More
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  • Strong Earnings Reports Propel U.S. Equity Futures Higher 0 comments
    Jul 15, 2011 9:01 AM | about stocks: FHN, C, JPM, COF, ZION, HBAN, GS, BK, WFC, CBSH, CATY, FCF, PNFP
    This morning.  The four major indexes experienced distribution days yesterday, and the U.S. equity market uptrend remains under pressure.  The SPX and NYSE composite both closed below their respective 50-day moving averages.  In Asia, equity markets closed mixed, on generally higher volume.  European equity indexes are lower, but better than the worse levels of the day.  U.S. equity futures are moderately higher, and strengthening after this morning’s, better-than-expected Citigroup earnings report.  U.S. Treasury prices are lower.  The dollar is slightly weaker.  Commodities markets are mixed.   After a fair value adjustment of -2.08 points, September SPX equity futures are at 1311.60, up +6.98 points.  The SPX opens at 1308.87, -4.01% below its recent April 29 multi-year closing high, and +0.18% above and -0.36% below its respective 20- and 50-day moving averages.  The SPX is +4.04% above its 1257.64 year-end close.  Next resistance is at 1321.66.  Next support is at 1301.29.
    Thursday, U.S. equity markets rallied initially, but quickly lost their momentum and gave ground throughout the day. Volumes were higher on all the major exchanges.  The macro-focus was on Fed Chairman Bernanke’s testimony, the progress of U.S. debt ceiling negotiations, and Eurozone issues. Also, S&P followed Moody’s lead that it had placed the U.S. on watch for potential downgrade.  NYSE volume rose +4.71% to 0.96x the 50-day moving average.  All market segments closed lower, with health care, utilities, and consumer goods losing least, while basic materials, industrials, and technology fared worst. Financials began as leaders on JPMorgan’s report, but sold off and ended with a moderate -0.76% loss.  The Nasdaq posted a loss of -1.22%, followed by the NYSE composite, SPX, and DJI, which lost -0.68%, -0.67%, and -0.44%, respectively.  Market breadth was negative, and up volume lagged down, both my large degrees.  Volatility rose +4.47% to end at 20.80, compared to 19.91 at the prior day’s close, but once again the VIX moved within a wide range, to an intraday low of 19.35 at 10:30, before rising to an intraday peak of 21.58 shortly before 1:30. Trading desks reported a busier day, but without much direction or conviction. Fast money dominated, while long-only money remains sidelined.

    Recent market weakness is pressuring the market uptrend that began on June 21st.   The distribution day count rose to 6 on the NYSE composite, 5 on the SPX and DJI, and 4 on Nasdaq.  The BKX count rose to 6 distribution days.  Distribution days signal institutional selling in the prior 25 trading days, or since the commencement of the most recent uptrend.
    In Asia, market uptrends in Japan and China are also under pressure.  Asian equity markets closed mixed, on mixed volume.  Action was attributed to U.S. debt ceiling talks.  In Japan, the Nikkei rose +0.39%, but closed at 9974.47, below 10,000 for the 4th consecutive day though still well above its 50-, 100-, and 200-day moving averages.  Volume fell -20.5%.  The NKY gapped lower to an intraday low of 9919.10, rallied, retested the intraday low again in the morning session, and the rallied through most of the remaining session to end near its 9985.32 intraday high. The NKY closed +5.98% above its June 16th correction low.  Most segments closed higher, with health care, basic materials, and oil and gas the leaders, while financials, telecommunications, and consumer services lagged. Financials rose +0.18%.
    In China, the Hang Seng and Shanghai composite closed mixed, with a -0.30% loss and +0.35% gain, respectively.  Volume was unchanged and up +13.4%, respectively.  The SHCOMP closed at 2820.17, +7.59% above its June 20th correction low.  The day’s action was quite positive, gapping lower at the open to a 2794.16 intraday low at 10:00, followed by an immediate positive reversal to its 2821.34 intraday high. The SHCOMP trended lower again through early afternoon, before reversing again to end just short of the day’s high. Most market segments rose, with stronger performance from telecommunications, health care, and consumer services.  Consumer goods, utilities, and oil and gas lagged. Financials gained +0.15%. The SHCOMP ended -7.76% below its recent April 18th 3057.33 high, +0.43% above its 2010 close, and +1.83% above the 2769.25 50-day moving average. 
    In Europe, equity markets are mixed and improving as U.S. equity futures have strengthened. The EuroStoxx50, FTSE, and DAX are -0.30%, +0.09%, and +0.02%, respectively.  Equity markets gapped lower, but have rallied from morning lows to reduce losses or reverse to the upside. The EuroStoxx50 is at 2685.42, compared to its 2662.82 intraday low.  Market segments are mostly lower.  Consumer goods and consumer services are higher.  Financials, utilities, and industrials are the laggards.  Financials are down -0.59%.
    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 fell to 0.12225%, from 0.12300% the prior day, the lowest reading in 2011 and down from 0.25188% at year-end.  USD 3-month LIBOR was unchanged at  0.24975% compared to 0.24975% the prior day, but down from 0.30950% at year-end.  The U.S. dollar is slightly weaker against the euro, pound, and yen.  The dollar trades at US$75.205, above its US$75.00 50-day and 75.18 100-day moving averages, but below its 76.93 200-day moving average.  The euro trades at US$1.4150, compared to US$1.4143 Thursday and US$1.4167 the prior day.  The Euro trades below its US$1.4311 50-day and US$1.4291 100-day moving averages.  The dollar trades at ¥79.17, compared to ¥79.14 Thursday and ¥78.98 the prior day.  The yen trades better than its 50-day moving average ¥80.68.  U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.371% and 2.957%, respectively, compared to 0.367% and 2.953% Thursday.  The yield curve was unchanged at +2.586%, from +2.586% 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, but mostly lower, with mixed energy, and lower precious metals, aluminum and copper, and mixed agriculture.
    U.S. news and economic reporting.  Today’s economic reports include June consumer prices and empire manufacturing. Consumer prices were largely in-line with survey. Empire manufacturing showed continued contraction at -3.76, compared to survey +5.0 and prior -7.79.
    Overseas news:  Today at 12:00pm eastern time, the Eurozone will release its bank stress test results.  Press reports indicate that 10 of the 90 banks tested will “fail.”  Also, Italy’s lower house of parliament will vote on the austerity package that passed its senate yesterday.  Today, the Bank of Korea cut its economic growth forecast to +4.3% versus the +4.5% prior estimate. 
    Company news/research:
    ·         FHN - reports  GAAP EPS and revenues of $0.16 and $361.6 million, respectively, beating earnings and revenue estimates of $0.11 and $361.1 million. 
    ·         C – reports GAAP EPS and revenues of $1.09 and $20.6 billion, respectively, beating earnings and revenue estimates of $0.96 and $19.87 billion. 
    1Q2011 Earnings.  The second quarter’s earnings results have so far exceed revenue and earnings expectations.  Of the 10 S&P500 companies that reported earnings to date, 80% (8 out of 10) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +7.4% (versus a historical average of +2%).  EPS is up +23.0% over the prior year.  Though challenged in the current operating environment, 100% of companies reported increased revenues over the prior year and 60% 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.  
    Out of the 4 BKX members to have reported earnings thus far, 100% (4 of 4) have beat earnings estimates on an operating basis.  Revenues have also exceeded expectations, with 75% of BKX members beating estimates.  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 13.2x estimated 2011 earnings ($99.25) and 11.6x estimated 2012 earnings ($112.91), compared to 13.3x and 11.7x 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 1.41x tangible book value and 12.4x 2011 consensus earnings, compared to 1.43x tangible book value and 12.5x 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.
    Thursday’s equity markets.  On higher volumes, the equity markets were lower.  The Nasdaq led all markets lower, off -1.22%. The NYSE, SPX, and DJI were all lower as well, off -0.68%, -0.67%, and -0.44%, respectively.  The markets began the day indicated higher after government reports were released which showed retail sales unexpectedly increasing and jobless claims falling more than expected.  Markets opened higher and advanced for the first hour as Bernanke began his Senate testimony.  Markets began to sell off during his Q&A, when Bernanke remarked that while the Fed remains ready to provide additional stimulus, it is “not prepared” at present to do so.  The market saw its lows at 1:30.  We bounced slightly in the early afternoon, but intensified in the last hour.
    Trading desks were slightly busier.  Traders reported better activity, but without much conviction with orders evenly divided between buyers and sellers. Most of the orders are from faster traders. Traditional long only accounts remain mostly on the sidelines.  Earnings reported to date have generally beaten estimates and a lack of preannouncements has investors anticipating a better earnings season. Macro-concerns continue to drive this market. The Bloomberg NYSE new net highs were -4 versus +27 for Wednesday. The relative strength indicator fell to 47.44 from Wednesday’s reading of 50.32 and is now in the neutral range. The VIX finished the day higher at 20.80, up +4.47%.  
    Market segments were negative. Health care, utilities, and consumer goods were the leaders, while basic materials, industrials, and technology were the laggards.
    Financials sold off and ended lower with the rest of the market.  The KRX, BKX, and XLF were down -1.98%, -1.23%, and -0.73%, respectively.  Among broader financials COF, PGR, and ZION were the laggards, off at least -3.53%.  The leaders were JPM, HBAN and GS. The BKX began the day higher on strong earnings from JPM and positive economic news.  The headline risk that we have seen for the last few weeks crept into the market after the first hour, and the BKX followed the general trend lower. JPM was the sole name that finished higher in the BKX, KRX and the SPX financials. The BKX finished the day with 1 name higher, 22 lower and 1 unchanged. Besides JPM, leaders included HBAN, BK and WFC. Laggards were CBSH, ZION, and COF, off at least -2.07%. The KRX finished the day with all 50 names lower. Leaders were MBFI, SIVB, and SNV. Laggards included CATY, FCF, and PNFP. Faster accounts continue to drive names lower on headline risk. We continue to see more ETF driven activity versus single stock investing. The BKX, KRX and XLF 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 -19.90% below its April 2010 high and -43.77% below its best level of 82.55 in September 2008.  
    NYSE Indicators.  Volume rose +4.71% to 925.21 million shares from 883.56 million shares Wednesday, 0.96x the 966.27 million share 50-day moving average.  Market breadth was negative, and up volume led trailed down volume, both by large margins.  Advancing stocks lagged decliners by -1732, compared to +964 the prior day), or 0.27:1.  Up volume lagged down volume by 0.22:1.
    SPX.  On higher volume, the SPX fell -8.85 points, or -0.67%, to 1308.87.  Volume rose +8.30% to 720.49 million shares, up from 665.26 million shares Wednesday but below the 737.65 million share 50-day moving average.  For the 183rd consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1313.61 vs. 1275.82, respectively).  The SPX closed above its 200-week moving average (1161.64).
    The SPX opened slightly above its prior 1317 closing level to the 1320 level.  By 10:00, positive momentum lifted the index to 1326 and the SPX set its intra-day high of 1326.88 at 10:26.  From 10:30 through 11:00, the index fell straight back to its break-even line and continued falling through 1:20.  At 11:35, the index crossed into negative territory and, at 1:20, the SPX set its intra-day low of 1306.51.  A sharp but brief rally through 1:35 retook 1315.  The index fell through the close and finished below 1310 and at the lower end of its trading range. 
    Technical indicators are neutral.  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 uptrend under pressure.  The SPX closed above 1300 for the 11th straight session.  The index closed above its April 2010 highs for the 154th straight session.  The 50-day moving average has been below the 100-day moving average since July 11thThe SPX closed (by +0.18%) above its 20-day moving average (1306.52) for the 12th straight session.  The index closed (by -0.36%) below its 50-day moving average and has fluctuated above and below that level since July 11thThe index closed (by -0.55%) below its 100-day moving average (1316.08).  The SPX closed +2.59% above its 200-day moving average.  The 50-day and 100-day moving averages declined.  The directional momentum indicator is positive for the 11th straight session but is narrowing, and the trend is weak and declining.  Relative strength fell to 48.72 from 51.98, a neutral range.  Next resistance is at 1321.66; next support is at 1301.29.
    BKX.  On higher volume, the KBW bank index fell -0.58 points, or -1.23%, to 46.42.  Volume rose +19.90% to 86.02 million shares, up from 71.45 million shares Wednesday and above the 77.97 million share 50-day average.  The BKX closed +8.00% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -19.90% and -16.56% below its April 23, 2010, and February 14, 2011 closing highs, respectively. 
    Financials underperformed the market, and regionals underperformed large-cap banks.  The BKX gapped higher at the open to 47.41, immediately setting the intra-day high.   Gains retraced to break-even by 9:45, but the index bounced off of its prior day’s close.  Momentum turned negative at 10:00, and the index fell into negative territory by 10:35.  Through 1:20, the index continued falling and set the intra-day low of 46.35 then.  A rally persisted until 2:15, and retook 46.80.  Momentum reversed again, and the index fell into the close, finishing near the day’s lows. 
    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 renewed risk aversion punish the sector.  The 20-day moving average (47.56) is below the 50- and 100-day moving averages (48.42 and 50.16, 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 fourth straight session.  The index closed below its 50-day moving average for the fifth straight session.  The index closed below the 100- and 200-day moving averages for the 65th and 31st consecutive sessions, respectively.  The index closed below the 50.00 level for the 30th straight session.  The 20-, 50-, and 100-day moving averages fell.  The 20-day closed (by -0.86 points) below the 50-day for the 85th straight day, but the gap narrowed.  The 50-day moving average closed (by -1.65 points) below the 200-day moving average for the 20th straight session, and the gap expanded.  The 100-day moving average closed (by +0.10 points) above the 200-day moving average for the 108th straight session, but the gap narrowed and indicates a cross to the downside by Monday’s close.  The directional movement indicator is negative for the fourth straight session, and the trend is moderate and stable.   Relative strength fell to 40.03 from 43.46, the lower end of a neutral rangeNext resistance is 47.10; next support at 46.04.
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