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U.S. Equity Futures Strengthen, European Markets Stage Positive Reversal

|Includes:BAC, BBT, CHCO, ETFC, FITB, FULT, GS, Huntington Bancshares Incorporated (HBAN), KEY, MS, RF, UBSI, USB, WTFC

This morning.  U.S. equity markets are in an uptrend, though recent action remains choppy and the distribution day count is elevated.  In Asia, equity markets closed mostly lower after a poor Chinese PMI report.  European equity indexes have reversed their earlier losses and are now moderately higher.  Despite another poor continuing jobless claims weekly report, U.S. equity futures are higher and strengthening on generally robust earnings reports.  U.S. Treasury prices are lower.  The dollar is slightly weaker.  Commodities markets are mixed.   After a fair value adjustment of +0.44 points, September SPX equity futures are at 1329.20, up +7.26 points.  The SPX opens at 1325.84, -2.77% below its recent April 29 multi-year closing high, and +0.86% and +1.08% above its respective 20- and 50-day moving averages.  The SPX is +5.42% above its 1257.64 year-end close.  Next resistance is at 1329.63.  Next support is at 1322.85.

Wednesday, U.S. equity markets closed mixed on mixed volume.  Markets gapped higher on generally strong earnings reports and strong equity gains in Europe, but long-only investors remained sidelined, and markets immediately lost their early momentum.  Market internals were positive, but without Tuesday’s strength.  The NYSE composite rose +0.33%, while the Nasdaq, DJI, and SPX lost -0.43%, -0.12%, and -0.07%, respectively.  NYSE volume fell -8.54% to 0.83x the 50-day moving average.  Financials, utilities, and industrials closed higher.  Technology, consumer goods, and consumer services closed lower.  Financials gained +0.98%.  Nasdaq volume rose, and that index recorded another distribution day.  Volatility fell -0.62% to end at 19.09, compared to 19.21 at the prior day’s close.  Trading desks reported a quiet trade, with long-only investors still on the sidelines.

The distribution day count is 6 on the NYSE composite, and 5 on the SPX, DJI, and Nasdaq.  The BKX count is unchanged at 7.  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 remain under pressure.  In Japan, the Nikkei closed with a slight +0.04% gain, on a +20.1% increase in volume.  Market segments were mostly higher, with the best performance from consumer services, oil and gas, and telecommunications.  Industrials, basic materials, and consumer goods were the laggards.  Financials lost -0.24%.  The NKY opened higher, but sold off through the morning to an intraday 9974.0 low at noon, when it reversed and rebounded to close above 10,000 for a 2nd consecutive day.  On a weak HSBC “flash” PMI report, Chinese equity markets closed lower, with Hang Seng and the Shanghai composite down -0.07% and -1.01%, respectively.  In Hong Kong, volume rose +5.33%.  Markets opened higher, sold off through mid-morning, then reversed and trended higher through mid-afternoon, before selling off in the final hour to end with a modest loss.  Market segments closed mixed, with telecommunications, consumer services, and industrials up at least +0.91%, while consumer goods, oil and gas, and technology closed at least -1.08% lower.  Financials rose +0.06%.  The SHCOMP closed at 2765.89, +5.52% above its June 20th correction low.  The index opened higher, but quickly reversed and trended lower through the day to close just above its 2763.42 intraday low.  Volume fell -2.62%.  All market segments closed lower, with best performance from consumer goods, telecommunications, and financials, while industrials, utilities, and basic materials lagged.  Financials fell -0.70%.  The SHCOMP ended -9.53% below its recent April 18th 3057.33 high, -1.50% below its 2010 close, and +0.12% above the 2762.71 50-day moving average.

In Europe, equity markets have reversed earlier losses and are now moderately higher.  Attention focuses on meetings of Eurozone political leaders, who are again attempting to cobble together a workable approach to its multiple sovereign debt crises.  The EuroStoxx50, FTSE, and DAX are higher, +1.41%, +0.38%, and +0.71%, respectively.  Equity markets gapped higher, but lost substantial ground through mid-morning.  At noon, markets had recovered most of their earlier losses.  Equities strengthened markedly in the afternoon session, with the EuroStoxx50 at 2751.04, compared to its 2675.92 intraday low.  All market segments are higher, led by financials, consumer services, and utilities.  Consumer goods, industrials and health care are the laggards, but are at least +0.13% higher.  Financials are up +2.80%, extending the outsized prior days’ gains.

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 rose to 0.12250%, compared to 0.12225% the prior day and down from 0.25188% at year-end.  USD 3-month LIBOR is unchanged at +0.25300%, compared to 0.25300% the prior day, but down from 0.30950% at year-end.  The U.S. dollar is mixed against the euro, pound, and yen.  The dollar trades at US$75.001, below its US$75.01 50-day, US$75.12 100-day, and US$76.89 200-day moving averages.  The euro trades at US$1.4179, compared to US$1.4215 Wednesday and US$1.4156 the prior day.  The Euro trades below its US$1.4300 50-day and US$1.4303 100-day moving averages.  The dollar trades at ¥78.85, compared to ¥78.78 Wednesday and ¥79.18 the prior day.  The yen trades better than its 50-day moving average ¥80.54.  U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.375% and 2.934%, respectively, compared to 0.379% and 2.928% Wednesday.  The yield curve narrowed to +2.559%, from +2.549% 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 lower energy, lower precious metals, aluminum and copper, and higher agriculture.

U.S. news and economic reporting.  Today’s economic reports focus on the latest week’s initial and continuing jobs claims, with claims rising to 418K compared to 410K survey and 405K prior.

Overseas news:  Last evening, French President Sarkozy and German Chancellor Merkel reached an agreement on handling Greece’s sovereign debt problems and will present their accord to other Eurozone leaders at today’s meeting.  According to press reports, the French/German agreement will not push for a bank tax to finance any Greek rescue package.  Today, Spain sold the top end of its targeted range for their 10- and 15-year bond auctions, but yields rose +60 and +17 basis points, respectively, over each issue’s prior June auctions.  In July, both the Eurozone and Chinese purchaser manager indexes fell more than expected, with China’s falling below the 50.0 level expansionary threshold.


Company news/research:

·         HBAN – reports GAAP and operating EPS of $0.16 and $0.16, respectively, compared to estimates of $0.15

·         FITB – reports GAAP and operating EPS of $0.34 and $0.31, respectively, compared to estimates of $0.27

·         BBT – reports GAAP and operating EPS of $0.44 and $0.43, respectively, compared to estimates of $0.43

·         MS – reports GAAP EPS of -$0.38 compared to estimates of -$0.61; the loss stemmed from Mitsubishi’s conversion of its preferred shares into common stock, resulting in an -$1.7 billion accounting charge


1Q2011 Earnings.  The second quarter’s earnings results have so far exceed revenue and earnings expectations.  Of the 90 S&P500 companies that reported earnings to date, 84% (76 out of 90) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +6.9% (versus a historical average of +2%).  EPS is up +20.9% over the prior year.  Though challenged in the current operating environment, 81% of companies reported increased revenues over the prior year and 76% 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 18 BKX members to have reported earnings thus far, 89% (16 of 18) have beat earnings estimates on an operating basis.  Revenues have also exceeded expectations, with 82% 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 13.3x estimated 2011 earnings (increased to $99.54 from $99.39) and 11.7x estimated 2012 earnings ($112.91), compared to 13.3x 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 +5.2%, and +5.2%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.4% and +33.2%, respectively.


Large-cap banks trade at a median 1.32x tangible book value and 12.3x 2011 consensus earnings, compared to 1.32x tangible book value and 12.3x 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 +34.7% and +69.2%, respectively.


Wednesday’s equity markets. On mixed volume, equity markets finished mixed. The NYSE was higher, up +0.33%, while the Nasdaq, DJI, and SPX were lower, off -0.43%, -0.12%, and -0.07%, respectively. The markets were indicated slightly higher in the pre-market as earnings season continued with more companies beating estimates than not. The markets bounced between positive and negative throughout the day. Investors seemed to lack conviction, with movement in individual names driven by short term accounts. Tuesday night, AAPL had set the tone as they recorded their strongest earnings ever, reporting $28.57 billion in revenues versus estimates of $25.02 billion. Extremely strong I-Phone and I-Pad sales set the tone for the earnings beat. This coupled with earnings we saw Wednesday morning should have had the markets indicated higher, however, as in past sessions, investors remained more concerned about macro issues and the market’s overall were quiet. The European debt crisis will receive additional information on Thursday when Euro zone leaders meet in Brussels for an emergency meeting about Greece’s financial condition. This, coupled with the ongoing negotiations here in the US about our own deficit reduction and debt extension package has investors focused away from what can be summed up as a positive earnings season so far.

Trading desks reported a relatively quiet session as the headlines that have driven gains and losses in past sessions seemed to be non-existent. With the markets near neutral throughout the day, long accounts remain on the sideline, while faster accounts attempt to make money in names reporting earnings or with some tidbit of news. Traders report a lack of conviction among larger accounts and are hopeful that we will see some resolution to our debt extension and possible deficit reduction discussions that are ongoing on Capitol Hill. The AAII Investor Sentiment Bullish reading was 39.86, slightly higher than last week’s 39.31. The Investment Company Institute (NYSEARCA:ICI) reported on Wednesday that domestic equity funds had experienced outflows of -$4.056 mm. Domestic equity funds have experienced outflows for an eighth consecutive week. The Bloomberg NYSE new net highs were +63 versus Tuesday’s reading of +50. The relative strength indicator rose minimally to 52.61, from Tuesday’s reading of 51.23, and remains in the neutral range. The VIX finished the day lower at 19.09, off -0.62%.

Market segments were mixed. Financials, utilities, and industrials were the leaders, while technology, consumer goods and consumer services were the laggards.

On strong earnings, financials were the strongest sector. The BKX, XLF, and KRX were all significantly higher, up +1.45%, +1.14%, and +0.70%. Among broader financials, ETFC was up the most, gaining +13.7% as investors speculated on a take out after Citadel, ETFC’s largest shareholder, called on the online retail broker to hold a special meeting to remove two directors. Other leaders included USB, MS, and GS, up at least +3.32%.  The BKX was higher from the open and reached its intraday high late in the afternoon as investors bought banks that had reported earnings or are due to report.  However, financial traders indicated that long only accounts remain on the sidelines, and that individual stock order volume was light. The BKX had 23 names higher and 1 lower.  Leaders on the BKX included BAC, KEY, and RF, up at least +1.86%. The KRX had 37 names higher and 13 lower. Leaders were FULT, UBSI and BXS, while CHCO and WTFC were the laggards. Thursday brings another round of financial earnings with several names due to report including HBAN, BBT, and FITB.  The BKX and XLF finished below their 50-, 100-, and 200-day moving averages. The KRX was above its 50-day average, but below the 100- and 200-day moving average. While broader indexes recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -19.03% below its April 2010 high and -43.16% below its best level of 82.55 in September 2008.

NYSE Indicators.  Volume fell -8.54% to 796.28 million shares, from 870.65 million shares Tuesday, 0.83x the 957.51 million share 50-day moving average.  Market breadth was positive, and up volume led down volume, but by narrow margins.  Advancing stocks led decliners by +337, compared to +1749 the prior day, or 1.25:1.  Up volume led down volume by 1.38:1.

SPX.  On lower volume, the SPX decreased -0.89 points, or -0.07%, to 1325.84.  Volume declined -3.69% to 644.76 million shares, down from 669.43 million shares Tuesday and below the 735.16 million share 50-day moving average.  For the 187th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1311.71 vs. 1279.35, respectively).  The SPX closed above its 200-week moving average (1160.67).

The SPX gapped higher at the open to the 1330.43 level, its intra-day high.  By 10:00, the index declined to 1325.  Over the next ten minutes, the index climbed 3 points, reaching 1328 by 10:10.  This bounce was quickly retraced, by 10:18 the SPX declined to 1323, its intra-day low.  The index rallied over the next hour, climbing to 1328 by 11:19.  A small sell-off followed, taking the index down to 1324 by 12:45.  The index rallied in the afternoon, rising to 1330 by 2:40.  In the final hour of trading, the index sold-off, declining to 1325 by 3:55.  The S&P500 closed the day at 1325.84.

Technical indicators are neutral.  The index’s reversal in June’s second half returned markets to an uptrend on June 21st, confirmed on June 30th.  The SPX closed above 1300 for the 15th straight session.  The index closed above its April 2010 highs for the 158th straight session.  The 50-day moving average has been below the 100-day moving average since July 11thThe SPX closed (by +0.86%) above its 20-day moving average (1314.58).  The index closed (by +1.08%) above its 50-day moving average and has fluctuated above and below that level since July 11thThe index closed (by +0.72%) above its 100-day moving average (1316.33).  The SPX closed +3.63% above its 200-day moving average.  The 50-day and 100-day moving averages remained relatively stable.  The directional momentum indicator is positive for the second consecutive day.  Relative strength decreased to 54.55 from 54.89 a neutral range.  Next resistance is at 1329.63; next support is at 1322.85.

BKX.  On lower volume, the KBW bank index rose +0.67 points, or +1.45%, to 46.92.  Volume decreased -14.3% to 81.23 million shares, down from 94.89 million shares Tuesday but above the 78.59 million share 50-day average.  The BKX closed +9.17% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -19.0% and -15.7% below its April 23, 2010, and February 14, 2011 closing highs, respectively.

Large-cap banks outperformed the broader SPX. Regionals underperformed the large-cap banks but outperformed the broader S&P500 index.  The BKX opened the day at 46.39, its intra-day low. The large-cap banks rallied until 10:27, climbing to 47.13.  A sharp but brief sell-off followed the first-hour rally, taking the index down to 46.90 at 10:53.  The banks rallied sharply, climbing to 47.15 by 11:20 after which point the index traded down to 46.92 by 12:45.  In afternoon trading, the BKX rallied until 2:40, reaching its intra-day high of 47.19.  For the balance of the day, the bank index sold-off, finishing the day at 46.92.

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 (47.35) is below the 50- and 100-day moving averages (48.05 and 49.88, 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 eight straight sessions.  The index closed below its 50-day moving average for the ninth straight session.  The index closed below the 100- and 200-day moving averages for the 69th and 35th consecutive sessions, respectively.  The index closed below the 50.00 level for the 34th straight session.  The 20-day closed (by -0.71 points) below the 50-day for the 89th straight day, but the gap narrowed.  The 50-day moving average closed (by -1.99 points) below the 200-day moving average for the 24th straight session.  The 100-day moving average closed (by -0.158 points) below the 200-day moving average for the third time in 110 sessions.  The directional movement indicator is negative for the eighth straight session, but the trend may be reversingRelative strength rose to 46.50 from 41.16, in a neutral rangeNext resistance is 47.30; next support at 46.44.