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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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  • U.S. Equity Futures Mixed After Yesterday's Strong Gains 0 comments
    Jul 22, 2011 8:58 AM | about stocks: STI, CYN, C, BAC, NTRS, NYCB, FNFG, HBAN, TCBI, UMPQ, NPBC, CATY, BRKL, SNV
    This morning.  U.S. equity markets are in an uptrend, despite an elevated distribution day count.  In Asia, equity markets closed higher, responding favorably to Europe’s latest sovereign bailout. European equity indexes gapped higher, but have been trending modestly lower in the morning session. Similarly, U.S. equity futures are modestly higher, though well off the morning’s highs. U.S. Treasury prices are higher.  The dollar is slightly stronger.  Commodities markets are mixed.   Options markets suggest substantial market optimism. After a fair value adjustment of -2.77 points, September SPX equity futures are at 1341.30, up +1.27 points.  The SPX opens at 1343.80, -1.45% below its recent April 29 multi-year closing high, and +2.00% and +2.47% 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 1351.98.  Next support is at 1330.63.

    Thursday, U.S. equity markets advanced strongly, closing near intraday highs on rising volume.  Markets gapped higher as earnings reports continued to beat estimates. Trading desks reported better participation from long-only investors. The NYSE composite rose +1.57%, while the SPX, DJI, and Nasdaq gained +1.35%, +1.21%, and +0.72%, respectively.  NYSE volume rose +21.7% to 1.01x the 50-day moving average.  Financials, oil and gas, and health care led market segments. Consumer services, technology, and telecommunications lagged, but closed at least +0.49% higher.  Financials gained +2.36%.  Volatility fell -08.01% to end at 17.56, compared to 19.09 at the prior day’s close.
    The distribution day count is 6 on the NYSE composite, and 5 on the SPX and DJI, and 4 on the 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, Japanese and Chinese equity markets are also in confirmed uptrends. In Japan, the Nikkei closed up +1.22%, on a +7.20% increase in volume.  Most market segments closed higher, led by financials, consumer services, and industrials. Financials popped +2.18%. Health care, telecommunications, and utilities lagged. The NKY gapped higher, but traded sideways through the morning session, then gradually strengthened to a mid-afternoon intraday high of 10149.2 before closing at 10132.11. The NKY closed above its 50-, 100-, and 200-day moving averages. It closed +8.35% above its June 20th correction low, but is -0.95% below the 2010 close. In China, the Hang Seng and Shanghai composite closed up +2.08% and +0.18%, respectively. In Hong Kong, volume rose +29.8%.  Markets gapped higher and trended higher through the day to close at the intraday high. All market segments closed at least +0.83% higher, led by basic materials, consumer goods, and consumer services. Industrials, technology, and utilities lagged. Financials rose +2.14%.  The Hang Seng is +3.91% above its June 20th correction low. In Shanghai, gains were more modest, and the SHCOMP closed at 2770.79, +5.70% 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 -14.2%.  Market segments were mostly higher, with best performance from technology, consumer goods, and basic materials, while consumer services, financials, and oil and gas lagged. Financials lost -0.01%. The SHCOMP ended -9.37% below its recent April 18th 3057.33 high, -1.33% below its 2010 close, and +0.38% above the 2760.36 50-day moving average.
    In Europe, equity markets are moderately higher, but off their best levels. The EuroStoxx50, FTSE, and DAX are higher by +0.68%, +0.84%, and +0.54%, respectively.  Equity markets gapped higher, but have trended modestly lower in the morning session. The Eurostoxx50 is 2781.96, compared to its 2796.57 intraday high.  Most market segments are higher, led by oil and gas, industrials, and telecommunications. Health care, consumer goods, and basic materials are the laggards. Financials are up +0.53%, 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 fell to 0.12225% from 0.12250% 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$74.076, below its US$74.95 50-day, US$75.08 100-day, and US$76.87 200-day moving averages.  The euro trades at US$1.4404, compared to US$1.4425 Thursday and US$1.4215 the prior day.  The Euro trades above its US$1.4311 50-day and US$1.4310 100-day moving averages.  The dollar trades at ¥78.47, compared to ¥78.30 Thursday and ¥78.78 the prior day.  The yen trades better than its 50-day moving average ¥80.48.  U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.387% and 2.997%, respectively, compared to 0.399% and 3.014% Thursday.  The yield curve narrowed to +2.610%, from +2.615% 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 mostly higher, with higher energy, precious metals, mixed aluminum and copper, and higher agriculture.
    U.S. news and economic reporting.  There are not U.S. economic reports scheduled today.
    Overseas news: Yesterday,European leaders agreed on a package to ease Greece’s debt burden while maintaining Greek sovereign paper’s qualification as collateral at the European Central Bank.  Press reports indicate that European banks will need to take a -20% write down on their Greek debt holdings.  Today, the Irish government said it would not raise its tax rate despite agreeing to discuss the issue with Eurozone officials.  In July, the German IFO business confidence index fell more than expected and to a 9-month low.  Today, a senior Chinese financial official said the country’s inflation cycle is near a turning point.
    Company news/research:
    ·         STI – reports GAAP and operating EPS of $0.33 and $0.31, respectively, compared to estimates of $0.31
    ·         CYN – reports GAAP and operating EPS of $0.88 and $0.79, respectively, compared to estimates of $0.77
    2Q2011 Earnings.  The second quarter’s earnings results have so far exceed revenue and earnings expectations.  Of the 115 S&P500 companies that reported earnings to date, 84% (97 out of 115) beat operating EPS estimates, versus the historical average 62%.  In aggregate, companies beat EPS expectations by an average of +8.5% (versus a historical +2% average).  EPS is up +18.3% over the prior year.  Though challenged in the current operating environment, 84% of companies reported increased revenues over the prior year and 77% 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.
    Of 22 BKX members to have reported earnings thus far, 82% (18 of 22) beat earnings estimates on an operating basis.  Revenues 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 13.5x estimated 2011 earnings ($99.57) and 11.9x 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 +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 1.33x tangible book value, and 12.4x and 10.7x 2011 and 2012 consensus earnings, respectively, compared to 1.32x tangible book value and 12.3x/10.6x 2011/2012 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 +35.1% and +68.9%, respectively.
    Thursday’s equity markets. On the heaviest volume of the week, the markets rose significantly. The NYSE, SPX, DJI, and Nasdaq were all higher, up +1.57%, +1.35%, +1.21%, and +0.72%, respectively. The markets were indicated higher in the pre-open and extended those gains as various companies reported earnings. MS beat the Street’s estimates and did so by accomplishing something its competition was not able to do, increasing trading revenues. An overwhelming amount of the 200 companies that reported on Thursday beat analysts’ estimates and this helped to set the tone for the day. The markets opened higher and climbed through the morning, pausing only for lunch, and continuing higher in the afternoon, but at a more tepid pace. News of deal in Brussels for a 2nd round of financial help for Greece helped to spark the market as this overhang is slowly removed, but not yet vanquished. Investors remain focused on the larger macro issues around the world and this was evidenced by the reaction to a single headline in the New York Times that claimed a deal had been reached between President Obama and House Speaker Boehner about deficit reduction and extension of the debt ceiling at 12:30. Even though no details were released with this headline, the corresponding spike in equities shows that investors are waiting for this large overhang to be removed or settled in some way. Investors never gave back the gains from that headline, even after it was denied quickly by both sides, as investors realized that any type of agreement will be met positively by the market.
    Trading desks report that they were better to the buy side by a two to one margin. They report that participants included both long only and faster accounts evenly, versus previous days when faster accounts made up the bulk of order flow. Traders report that the most active segment was financials, where the ratio was 3 to 1 better to buy. Investors seemed to garner more conviction as earnings season continues and has been overwhelmingly positive to date. Several large companies have reported this week, with a number of companies beating estimates significantly. The macro picture seems to be improving as well. After Thursday’s resolution in Greece, the debt/deficit negotiations will take center stage.  Parties involved in the negotiations understand what is at stake and those with more knowledge of the process have indicated that a deal will need to be reached by July 22/24 at the latest in order for appropriate legislation to be written, reviewed and voted upon by the Congress. The Bloomberg NYSE new net highs were +139 versus Wednesday’s reading of +63. The relative strength indicator rose to 58.57 from 52.61 the previous day and remains in the neutral range. The VIX fell to 17.56, off -8.01% and is at its lowest point since July 8th.
    Market segments were all positive. Financials, oil and gas, and health care were the leaders, while consumer services, technology, and telecommunications were the laggards.
    Financials continue to outperform on earnings. While a number of outside macro factors have been affecting the broad markets, continued earnings surprises have been a positive for financials. The XLF, BKX, and KRX were substantially higher on Thursday, up +2.40%, +2.32%, and +1.90%. After earnings that beat analysts’ estimates from HBAN, BBT, FITB and especially MS, the BKX and the other financial indexes were set to outperform. The BKX began the day higher, but flattened out in later morning trading. The headline about a possible deal between President Obama and House Speaker Boehner sparked the BKX to new highs. The BKX continued to gain through the afternoon as investors realized that any hint of a debt/deficit deal would be positive for financials. The BKX finished the day with 21 names higher and 3 lower. Names that outperformed in the BKX were C, BAC, and NTRS. The 3 laggards were NYB, FNFG, and HBAN. The KRX finished the day with 46 names higher and 4 lower. TCBI, UMPQ, and NPBC were the leaders, while CATY, BRKL, and SNV were the laggards. The BKX remains below it 50-, 100-, and 200-day average. The XLF is above its 50-day average, but below the 100- and 200-day moving average. The KRX finished above all its moving averages. While the broader indexes have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -17.15% below its April 2010 high and -41.84% below its best level of 82.55 in September 2008.
    Options markets. Options markets suggest excessive short-term market optimism.  The composite put/call ratio closed at 0.74, below the 0.75 level for the second time in three sessions and below its respective 5- and 10-period moving averages of 0.85 and 0.96.  The index put/call ratio closed below 1.00 for the third consecutive day at 0.96.  Its respective 5- and 10-period moving averages are 1.11 and 1.26. The equity put/call ratio closed the day at 0.57, below its respective 5- and 10-period moving averages.
    NYSE Indicators.  Volume rose +21.7% to 969.19 million shares, from 796.28 million shares Wednesday, 1.01x the 960.20 million share 50-day moving average.  By large margins, market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +1518, compared to +337 the prior day, or 4.19:1.  Up volume led down volume by 5.39:1.
    SPX.  On increased volume, the SPX increased +17.96 points, or +1.35%, to 1343.80.  Volume increased +28.8% to 830.30 million shares, up from 644.76 million shares Wednesday and above the 736.65 million share 50-day moving average.  For the 188th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1311.45 vs. 1280.26, respectively).  The SPX closed above its 200-week moving average (1160.72).
    The SPX gapped higher at the open to the 1332 level and continued to rally until 10:30, climbing to the 1344.  By 12:20, the index sold-off, declining to 1338.  Over the next twenty minutes, the index rallied sharply, reaching 1347, its intra-day high.  A small sell-off followed, taking the index down to 1342 by 12:50.  For the balance of the day, the SPX was largely range bound, vacillating between 1343 and 1346.  The S&P500 closed the day at 1343.80.
    Technical indicators are positive.  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 16th straight session.  The index closed above its April 2010 highs for the 159th straight session.  The 50-day moving average has been below the 100-day moving average since July 11thThe SPX closed (by +2.00%) above its 20-day moving average (1317.41).  The index closed (by +2.47%) above its 50-day moving average and has fluctuated above and below that level since July 11thThe index closed (by +2.07%) above its 100-day moving average (1316.49).  The SPX closed +4.96% above its 200-day moving average.  The 50-day and 100-day moving averages increased slightly.  The directional momentum indicator is positive for the third consecutive day.  Relative strength decreased to 60.04 from 54.55 a neutral range.  Next resistance is at 1351.98; next support is at 1330.63.
    BKX.  On higher volume, the KBW bank index rose +1.09 points, or +2.32%, to 48.01.  Volume increased +28.6% to 104.52 million shares, up from81.28 million shares Wednesday and above the 79.22 million share 50-day average.  The BKX closed +11.7% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -17.2% and -13.7% 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 47.41, its intra-day low. The large-cap banks rallied until 10:07, climbing to 47.79.  A sharp but brief sell-off followed the first-hour rally, taking the index down to 47.57 by 10:20.  The banks remained range bound until 12:40 when the index stood at 47.74.  Over the next five minutes, the index rallied sharply, reaching 48.05.  A small sell-off followed, taking the index down to 47.79 by 12:53.  For the balance of the day, the banks rallied, climbing to an intra-day high of 48.12 at 3:01.  The BKX closed the day at 48.01.
    Technical indicators are neutralBank stocks significantly underperformed the broader market during the May-June correction.  Recent outperformance during the market’s July rebound has resumed in recent trading.  The 20-day moving average (47.38) is below the 50- and 100-day moving averages (47.99 and 49.84, 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 nine straight sessions.  The index closed below its 50-day moving average for the tenth straight session.  The index closed below the 100- and 200-day moving averages for the 70th and 36th consecutive sessions, respectively.  The index closed below the 50.00 level for the 35th straight session.  The 20-day closed (by -0.61 points) below the 50-day for the 90th straight day, but the gap narrowed.  The 50-day moving average closed (by -2.05 points) below the 200-day moving average for the 25th straight session.  The 100-day moving average closed (by -0.203 points) below the 200-day moving average for the fourth time in 110 sessions.  The directional movement indicator is positive for the first time in eight sessions.  Relative strength rose to 53.84 from 46.50, in a neutral rangeNext resistance is 48.37; next support at 47.41.
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