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Gary Townsend - Founding partner 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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  • Better Futures, Quiet Bonds, Weaker Dollar As U.S. Debt Negotiations Grind On  0 comments
    Jul 26, 2011 9:11 AM | about stocks: SBNY, RF, USB, ETFC, FITB, NYCB, COF, HBAN, STBA, ASBC, SNV, TCBI, PB
    This morning.  Yesterday’s distributions are pressuring the U.S. equity markets uptrend. Despite U.S. debt ceiling “gridlock”, the reaction in world equity and bond markets remains muted. In Asia, equity markets closed higher, on mixed volume, with gains attributed to strong earnings. European equity indexes are mixed. U.S. equity futures are modestly higher.  U.S. Treasury prices are slightly lower.  Dollar weakness continues.  Commodities markets are mixed.  Options markets suggest mild market optimism.  After a fair value adjustment of +0.03 points, September SPX equity futures are at 1336.80, up +3.27 points.  The SPX opens at 1337.43, -1.92% below its recent April 29 multi-year closing high, and +1.99% and +1.54% above its respective 20- and 50-day moving averages.  The SPX is +6.31% above its 1257.64 year-end close.  Next resistance is at 1331.09.  Next support is at 1330.91.
    Monday, U.S. equity markets closed moderately lower on mixed volume.  The DJI, Nasdaq composite, and SPX lost -0.70%, -0.56%, and -0.56% on lower volume. The NYSE composite lost -0.60% on increased volume. Futures indicated a much lower open, and markets gapped lower, but equities staged an impressive reversal by midday. Macro factors dominated the afternoon session. Equities weakened on announcement of dueling congressional press conferences pushed investors to the sidelines. NYSE volume rose +3.44%, but trading was a light 0.80x 50-day moving average volume.  Of the major market segments, only utilities closed higher. Industrials, and technology were the other leaders, down -0.15%. Consumer goods, health care, and telecommunications closed lower. Financials lost -0.81%.  Volatility rose +10.5% to end at 19.35, compared to 17.52 at the prior day’s close.
    The distribution day count rose to 7 on the NYSE composite, but was unchanged at 5 on the SPX and DJI, and 4 on the Nasdaq.  The BKX count rose to 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 market are in confirmed uptrends.  In Japan, the Nikkei closed up +0.47%, on a +6.73% increase in volume.  Most market segments closed higher, with telecommunications, basic materials, and consumer services leading, while health care, oil and gas, and utilities lagged. Financials were middling performers with a +0.46% gain. The NKY gapped higher, but traded sideways through the day within a narrow range. The NKY closed at 10097.72, compared to its 10130.25 intraday high. The NKY closed above its 50-, 100-, and 200-day moving averages.  It closed +7.98% above its June 17th correction low, but is -1.28% below its 2010 close.  In China, the Hang Seng and Shanghai composite closed up +1.25% and +0.53%, respectively.  In Hong Kong, volume rose +31.6%. After a soft open, equities rallied strongly in the first half hour, and trended higher through the day to end just below the intraday high. All market segments closed at least +0.29% higher, led by technology, telecommunications, and financials, which rose +1.36%. Basic materials, industrials, and consumer services were the laggards. The Hang Seng is +4.50% above its June 20th correction low.  In Shanghai, the index rebounded after the large prior day’s loss following the weekend collision of two “bullet” trains.  The index opened modestly lower, and traded narrowly sideways through most of the session, but rallied into the close to end just below the intraday high. The SHCOMP closed at 2703.03, +3.12% above its June 20th correction low.  Volume fell -34.2%.  Most market segments closed higher, led by consumer services, oil and gas, and basic materials. Financials were a middling performer, up +0.22%. Industrials, utilities, and telecommunications turned in the worst performances. The SHCOMP ended -11.6% below its recent April 18th 3057.33 high, -3.74% below its 2010 close, and -1.90% below its 2755.25 50-day moving average.
    In Europe, equity markets are currently mixed.  The EuroStoxx50, FTSE, and DAX are down -0.20%, +0.11%, and +0.01%, respectively. Equity markets opened higher, but lost ground after a weak Italian bond sale. Intraday lows were set mid-morning, and equities subsequently rallied back to or just above the prior day’s close. The Eurostoxx50 is 2737.33, compared to its 2721.82 intraday low.  Market segments are mixed, led by basic materials, telecommunications, and utilities. Oil and gas, industrials, and consumer services are the worst performers.  Financials are down -0.15%.
    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 0.12200%, from 0.12250% the prior day, but down from 0.25188% at year-end.  USD 3-month LIBOR rose to +0.25260%, compared to 0.25210% the prior day, but down from 0.30950% at year-end.  The U.S. dollar is lower against the euro, pound, and yen.  The dollar trades at US$73.652, below its US$74.89 50-day, US$75.03 100-day, and US$76.84 200-day moving averages.  The euro trades at US$1.4481, compared to US$1.4377 Monday and US$1.4360 the prior day.  The Euro trades above its US$1.4319 50-day and US$1.4319 100-day moving averages.  The dollar trades at ¥78.11, compared to ¥78.29 Monday and ¥78.54 the prior day.  The yen trades better than its 50-day moving average ¥80.37.  U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.408% and 3.025%, respectively, compared to 0.408% and 3.001% Monday.  The yield curve widened to +2.617%, from +2.593% 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 higher energy, lower precious metals, mixed aluminum and copper, and higher agriculture.
    U.S. news and economic reporting.  Economic reports focus on May CaseShiller Home prices, consumer confidence, and the July Richmond Fed manufacturing index and June new home sales at 10:00.
    Overseas news. Italy sold 7.5 billion in 6-month bills, the maximum amount targeted, but at yields +27 basis points higher than in June  and finding lighter demand.  In the second quarter, U.K. GDP rose +0.2% over the prior quarter, in-line with estimates.  In July, French consumer confidence increased, surprising estimates calling for a decline. 
     
    Company news/research:
    ·         SBNY – reports GAAP and operating EPS of $0.87, compared to estimates of $0.78
    ·         RF – reports GAAP and operating EPS of $0.04, compared to estimates for $0.00
    ·         UBS – reports second quarter net income of CHF1.569 billion, compared to estimates of CHF1.866 billion. 
     
    2Q2011 Earnings.  The second quarter’s earnings results have so far exceeded earnings and revenue.  Of the 139 S&P500 companies that reported earnings to date, 82% (114 out of 139) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +7.90% (versus a historical average of +2.0%).  EPS is up +18.9% over the prior year.  Though challenged in the current operating environment, 85% of companies reported increased revenues over the prior year and 75% 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 23 BKX members to have reported earnings thus far, 83% (19 of 23) have beat earnings estimates on an operating basis.  Revenues have also exceeded expectations, with 83% 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 13.4x estimated 2011 earnings ($99.69) and 11.8x estimated 2012 earnings (increased to $113.53 from $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 +5.4%, and +5.8%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.6% and +33.9%, respectively.
     
    Large-cap banks trade at a median 1.30x tangible book value, and 13.0x and 10.6x 2011 and 2012 consensus earnings, respectively, compared to 1.31x tangible book value and 12.3x/10.7x 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 +34.7% and +68.9%, respectively.
    Monday’s equity markets.  On mixed volume, the equity markets finished lower. The DJI and NYSE fell -0.70% and -0.60%, respectively, while the SPX and Nasdaq closed off -0.56%.  Futures indicated a substantial early loss as the weekend passed without any definitive resolution of the US debt extension.  Markets opened on their intraday lows, but rebounded impressively through the morning.  News in early afternoon that there would be dueling congressional leaders’ press conferences began a sell-off. After hearing Senator Reid’s plan, investors stepped to the sidelines to awaited Mr. Boehner’s press conference after the close.
    Monday’s trade was largely typical of a mid-summer session, generally slow, but with price swings magnified when macro-events pushed buyers to the sidelines. Buyers continue to buy the dips and sell quickly to book gains. Earnings continue to support the market, but debt uncertainties continue to weigh on overall enthusiasm. Price action is driven primarily by fast accounts taking advantage of small price movements.  Equities rebounded strongly off early morning lows, followed by a relatively flattish trade through the late morning and a sell off at the end of the day.  The Bloomberg NYSE new net highs were 76 versus the previous reading of 139.  The relative strength indicator fell to 55.23 from Friday’s 58.37 reading and remains in the neutral range. The VIX rose to 19.35, up +10.5%, as investors bought protection in the weaker market.
    Market segments were mixed. Utilities, industrials, and technology were the leaders, while consumer goods, healthcare and telecommunications were the laggards.
    Financials lost ground. The XLF, KRX, and BKX closed off -0.72%, -0.61%, and -0.52%, respectively.  Among the broader financials, ETFC was the clear leader, up +5.68%, as the largest shareholder continues to push for a deal.  The BKX saw its lows, like the broader market, in the early trade and recovered nicely through the balance of the day.  Leaders in the BKX included FITB, USB, and RF, each up at least +0.16%. The laggards were NYB, COF, and HBAN, off at least -1.32%. The BKX finished the day with 4 names higher, 19 lower and 1 unchanged. The KRX finished the day with 11 names higher, 38 lower and 1 unchanged. Leaders on the KRX were STBA, ASBC, and BXS, up at least +1.28%. The laggards were SNV, TCBI, and PRSP, off at least -2.05%. Investors in financials, as within other sectors, seemed to be sidelined by the congressional debate over the debt. We heard from some desks that investors continue to add financials, but not as heartily on Monday as they did last week.  Earnings continue in the sector to be overwhelmingly positive. The BKX and XLF finished above their 50-day moving average, but below their 100- and 200-day moving averages. The KRX finished above its 50- and 200-day moving average, but below its 100-day moving average due to an inversion in the averages. While the broader indexes have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -17.91% below its April 2010 high and -42.37% below its best level of 82.55 in September 2008.
    Options markets.  The options markets are mixed. Equity options markets are mildly bullish while index options markets are neutral-to-bearish.  The composite put/call ratio closed at 0.93.  The composite put/call ratio is above its 5-period moving average of 0.80 but below its 10-period moving average of 0.92.   The index put/call ratio closed at 1.36, above 1.00 for the second time in three sessions.  The 5- and 10-period moving averages of the index put/call ratio are 1.05 and 1.20, respectively.  The equity put/call ratio closed the day at 0.61, above its 5- and 10-period moving averages of 0.60 and 0.65, respectively.
    NYSE Indicators.  Volume rose +3.44% to 763.67 million shares, from 738.24 million shares Friday, 0.80x the 951.70 million share 50-day moving average.  Market breadth was negative, and up volume lagged down volume.  Advancing stocks lagged decliners by -1849, compared to -145 the prior day, or 0.24:1.  Up volume trailed down volume by 0.28:1.
    SPX.  On lower volume, the SPX fell -7.59 points, or -0.56%, to 1337.43.  Volume fell -1.78% to 575.22 million shares, down from 585.65 million shares Friday and below the 730.43 million share 50-day moving average.  For the 190th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1311.28 vs. 1282.08, respectively).  The SPX closed above its 200-week moving average (1159.82).
    The SPX gapped lower at the open to the 1332 level and set the intra-day low of 1331.09 at 9:42.  Through 1:05, the index staged a steady rally, retaking 1340 at 11:25 and reaching the intra-day high of 1343.74 at 1:05.  Through 2:30, the index traded flat.  A sell-off took hold at 2:30, and dipped the index back to the 1338 level by 3:15.  The SPX traded flat at that level into the close and finished in the middle of the day’s range.   
    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 18th straight session.  The index closed above its April 2010 highs for the 161st straight session.  The 50-day moving average has been below the 100-day moving average since July 11thThe SPX closed (by +1.02%) above its 20-day moving average (1323.94).  The index closed (by +1.99%) above its 50-day moving average for the fifth consecutive day.  The index closed (by +1.54%) above its 100-day moving average (1317.17) for the fifth consecutive day.  The SPX closed +4.32% above its 200-day moving average.  The 50-day moving average fell.  The directional momentum indicator is positive for the fifth consecutive day, and the trend is weak and stable.  Relative strength fell to 57.04 from 60.39, a neutral range.  Next resistance is at 1344.14; next support is at 1330.91.
    BKX.  On higher volume, the KBW bank index fell -0.25 points, or -0.52%, to 47.57.  Volume rose +8.09% to 61.18 million shares, up from 56.60 million shares Friday, but below the 78.41 million share 50-day average.  The BKX closed +10.7% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -17.9% and -14.5% below its April 23, 2010, and February 14, 2011 closing highs, respectively.
    Financials underperformed the market, and regionals underperformed the large-cap banks.  The BKX gapped lower at the open to the 47.30 level and reached its intra-day low of 47.05 at 9:55.  Like the SPX, the BKX rallied through 1:05, rising 1.45% from its lows to the intra-day high of 47.73 at 1:05.  The index traded flat at the 47.60 level through 3:00.  A small sell-off to 47.50 was bought, but the index failed to retake 47.60 at the close.
    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 (47.50) is below the 50- and 100-day moving averages (47.88 and 49.75, 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 the 20-day moving average for the first time in 11 sessions.  The index closed below its 50-day moving average for the 12th straight session.  The index closed below the 100- and 200-day moving averages for the 72nd and 38th consecutive sessions, respectively.  The index closed below the 50.00 level for the 37th straight session.  The 20-day closed (by -0.39 points) below the 50-day for the 92nd straight day, but the gap narrowed.  The 50-day moving average closed (by -2.17 points) below the 200-day moving average for the 27th straight session.  The 100-day moving average closed (by -0.30 points) below the 200-day moving average for the sixth straight session.  The directional movement indicator switched to negative for the first time in three sessions.  Relative strength fell to 50.69 from 52.49, a neutral rangeNext resistance is 47.85; next support at 47.17.
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