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Gary Townsend
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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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  • U.S. Futures Weaken on Weak Durable Goods Reports, Debt Ceiling Dithering 0 comments
    Jul 27, 2011 9:01 AM | about stocks: PVTB, PNC, RF, BBT, HBAN, CBSH, FNFG, ZION, BXS, STBA, SNV, FMER, CATY
    This morning.  The past two day’s distributions are pressuring the U.S. equity market uptrend.  Despite diminished prospects for quick approval of increased U.S. debt capacity, the reaction in world equity and bond markets remains muted, with a more evident reaction in currency markets.  In Asia, equity markets closed mixed, on mixed volume. For a 3rd day, European equity indexes are moderately lower.  U.S. equity futures are modestly lower, though corporate earnings continue to surprise positively.  U.S. Treasury prices are slightly higher.  Dollar weakness continues.  Commodities markets are mixed.  Equity options markets suggest diminished market optimism.  After a fair value adjustment of +1.79 points, September SPX equity futures are at 1320.70, down -7.99 points.  The SPX opens at 1331.94, -2.32% below its recent April 29 multi-year closing high, and +0.41% and +1.58% above its respective 20- and 50-day moving averages.  The SPX is +5.91% above its 1257.64 year-end close.  Next resistance is at 1337.10.  Next support is at 1328.18.
    Tuesday, U.S. equity markets closed moderately lower on increased, if unimpressive volume that was well below 50-day moving averages as long-only accounts remained sidelined.  The DJI, SPX, NYSE composite, and Nasdaq lost -0.73%, -0.41%, -0.31%, and -0.10%, respectively. Futures indicated a moderately lower open, and markets lost ground through 10:00, but rallied back to small beer gains after 2:00, before losing ground into the close. Macro factors dominated the afternoon session, weakening on news that the White House would veto the House Speaker’s latest debt proposal. NYSE volume rose +3.44%, but trading was a light 0.80x 50-day moving average volume.  Of the major market segments, only technology and telecommunications closed higher.  Health care, basic materials, and industrials were laggards.  Financials lost -0.14%.  Volatility rose +4.55% to end at 20.23, compard to 19.35 at the prior day’s close.
    The distribution day count rose to 8 on the NYSE composite and 6 on the SPX and DJI. The Nasdaq count remained unchanged at 4. The BKX count rose to 9.  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 in confirmed uptrends, but under pressure.  Market commentary remains focused on the resolution of U.S. debt authorization and dollar weakness, which is expected to impact exports, reducing growth. In Japan, the Nikkei closed down -0.50%, on a +11.1% increase in volume.  All market segments closed lower. Health care, industrials, and technology led. Basic materials, financials, and utilities were the laggards. Financials lost -1.10%.  The NKY gapped lower, to an intraday low 10009.40, but trended up through the session to narrow losses. The NKY closed at 10047.19.  The NKY closed above its 50-, 100-, and 200-day moving averages.  It closed +7.44% above its June 17th correction low, but is -1.78% below its 2010 close.  In China, the Hang Seng closed down -0.13%, but the Shanghai composite rose +0.76%. In Hong Kong, volume fell -15.4%.  As in Japan, indexes gapped lower, but rallied to a moderate gain in mid-afternoon before profit taking pulled the index back to a loss at the close. Market segments closed mixed, with the best performance from basic materials, consumer goods, and utilities, while oil and gas, technology, and consumer services were down at least -0.21%.  The Hang Seng is +4.36% above its June 20th correction low.  In Shanghai, equities staged a positive reversal and extended the prior day’s gains. The index traded immediately to an intraday low of 2680.43, then trended higher through the session’s remainder, closing just below the 2726.80 intraday high. The SHCOMP closed at 2723.49, +3.90% above its June 20th correction low.  Volume rose +10.4%.  Most market segments closed higher, led by health care, basic materials, and technology. Utilities, consumer services, and financials lagged. Financials closed down -0.14%. The SHCOMP ended -10.9% below its recent April 18th 3057.33 high, -3.01% below its 2010 close, and -1.05% below its 2755.25 50-day moving average.
    In Europe, equity markets are moderately lower. The EuroStoxx50, FTSE, and DAX are down -0.95%, -0.35%, and -0.36%, respectively.  Equity markets opened lower, and have traded near their intraday lows through the morning session. The Eurostoxx50 is at 2713.15, compared to its 2707.98 intraday low.  Market segments are mixed, led by technology, basic materials, and consumer goods. Consumer services, utilities, and financials are the worst performers.  Financials are down -2.57%. The Eurostoxx50 is +3.54% above its recent July 18th correction low, but is off -2.79% in 2011.
    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 0.12225%, from 0.12200% the prior day, but down from 0.25188% at year-end.  USD 3-month LIBOR rose to +0.25285%, compared to 0.25260% the prior day, but down from 0.30950% at year-end.  The U.S. dollar is slightly stronger against the euro and pound, but is weaker against the yen.  The dollar trades at US$73.647, below its US$74.85 50-day, US$74.99 100-day, and US$76.81 200-day moving averages.  The euro trades at US$1.4473, compared to US$1.4511 Tuesday and US$1.4377 the prior day.  The euro trades above its US$1.4324 50-day and US$1.4325 100-day moving averages.  The dollar trades at ¥77.82, compared to ¥77.88 Tuesday and ¥78.29 the prior day.  The yen trades better than its 50-day moving average ¥80.28.  U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.399% and 2.947%, respectively, compared to 0.387% and 2.953% Tuesday.  The yield curve narrowed to +2.548%, from +2.566% 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, higher precious metals, aluminum and copper, and mixed agriculture.
    U.S. news and economic reporting.  Economic reports include MBA mortgage applications for the latest week, and June durable goods orders. Mortgage applications fell -5.0%, compared to prior +15.5%. Durable goods orders fell -2.1%, compared to +0.3% survey, and +1.9% prior. Ex-transportation, durable goods rose +0.1%, compared to +0.5% survey and +0.6% prior.  This afternoon, the Fed releases its Beige Book of current economic conditions in each of the 12 Fed districts. Tomorrow’s focus reverts to employment trends with the release of initial and continuing jobless claims for the latest week.
    Overseas news: Today, news reports stated the People’s Bank of China will not raise reserve requirements or interest rates in either July or August.  Today, German Finance Minister Schaeuble said his government was against “carte blanche” sovereign bond purchase activity under the newly expanded authority of the Eurozone rescue fund. 
     
    Company news/research:
    ·         PVTB – cut to hold at Stifel Nicolaus.
    ·         PNC – acquires 27 branches, $240 million of deposits, and no loans in the Atlanta area from Flagstar Bank for $42 million, at book value. 
    ·         European Banks – downgraded to neutral at Goldman Sachs
     
    2Q2011 Earnings.  The second quarter’s earnings results have so far exceed revenue and earnings expectations.  Of the 185 S&P500 companies that reported earnings to date, 80% (148 out of 185) 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 +18.3% 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 ($99.56) and 11.7x estimated 2012 earnings (increased to $113.53 from $112.91), compared to 13.4x 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 +5.8%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.4% and +33.9%, respectively.
     
    Large-cap banks trade at a median 1.29x tangible book value, and 12.9x and 10.6x 2011 and 2012 consensus earnings, respectively, compared to 1.30x tangible book value and 13.0x/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 +32.5% and +68.9%, respectively.
    Tuesday’s equity markets.  On increased volume, equity markets ended moderately lower.  The DJI, SPX, NYSE, and Nasdaq closed off -0.73%, -0.41%, -0.31%, and -0.10%, respectively.  Futures indicated a lower open after dueling previous night’s political speechifying. Markets fell to their intraday lows in the first hour, then rallied well, but within a relatively tight range for through mid-afternoon, when disappointing political news stimulated selling while buyers stood aside. Economic data released at 10:00 showed unexpected improvement in consumer confidence as the Conference Board’s index rose to 59.5 from the previous month’s 57.6 and higher than the estimate of 56. New home sales were slightly lower than estimates.
    Trading desks indicated a busier morning, but a quieter afternoon. Most characterize investors as calm, yet concerned as they watch debt ceiling discussions drag on.  Long-only funds continue to be mostly on the sidelines with faster accounts accounting for most trading volumes and trends.  The afternoon’s sell-off may have been more a case of disinterest and lack of buyers than for-sale volumes. Earnings continue to outperform. Paired with the debt-ceiling concerns, investors face a conundrum.  Resolution to the debt-ceiling negotiations should be a positive.
    Market segments were mixed. Technology, telecommunications, and consumer services were the leaders, while health care, basic materials, and industrials were the laggards.
    Financials were a middling performer.  The KRX, BKX, and XLF closed off -1.02%, -0.36%, and -0.13%, respectively. The BKX began the day even, but sold off with the rest of the market in the first half hour. The BKX rebounded back to positive on the consumer confidence surprise, but couldn’t hold its gains through the afternoon. The BKX moved back to negative at 2:00, and closed near its intraday low. In the BKX, 6 names finished up and 18 finished lower.  Outperformers included RF (+3.38%), BBT (+0.84%) and HBAN (+0.5%). The laggards included CBSH, FNFG, and ZION, off at least -1.33%.  The KRX finished the day with 6 names higher and 44 lower. Leaders included BXS, STBA, and SNV.  Laggards were FMER, PVTB, and CATY.  The BKX closed lower for the past 3 sessions.  Investors seem to agree that financials have generally outperformed on earnings, but investors remain on the sidelines until a U.S. debt resolution.  The BKX and XLF finished below their respective 50-, 100-, and 200-day moving averages. The KRX finished above its 50-day average, but below the 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 -18.2% below its April 2010 high and -42.6% below its best level of 82.55 in September 2008.  
    Options markets.  Options markets are mixed.  Equity options markets are slightly bullish, whereas index options markets are neutral.  The composite put/call ratio closed at 0.80. The composite put/call ratio is below both its 5- and 10-period moving averages of 0.82 and 0.89, respectively.  The index put/call ratio closed at 1.11.  The 5- and 10-period moving averages of the index put/call ratio are 1.10 and 1.17, respectively.  The equity put/call ratio closed the day at 0.59, below its 5- and 10-period moving averages of 0.60 and 0.64, respectively.
    NYSE Indicators.  Volume rose +9.60% to 837.02 million shares, from 763.67 million shares Monday, 0.88x the 950.48 million share 50-day moving average.  Market breadth was negative, and up volume lagged down volume.  Advancing stocks lagged decliners by -974, compared to -1849 the prior day, or 0.51:1.  Up volume trailed down volume by 0.61:1.
    SPX.  On higher volume, the SPX fell -5.49 points, or -0.41%, to 1331.94.  Volume rose +13.0% to 652.44 million shares, up from 575.22 million shares Monday but below the 728.78 million share 50-day moving average.  For the 191st consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1311.17 vs. 1282.92, respectively).  The SPX closed above its 200-week moving average (1159.79).
    The SPX opened flat to the prior day’s close at the 1337.50 level.  Through 10:10, the index fell, crossing 1334 at 9:45 and reaching the intra-day low of 1329.59 at 10:10.  Finding support at 1330, the SPX’s momentum reversed.  By 11:30, the index retook 1336.  Through 2:00, the index traded in a narrow 1334-1336 range.  A 2:00 rally lifted the index back to break-even by 2:15 and set the intra-day high of 1338.51 at 2:20.  At 2:30, news that President Obama would veto Speaker Boehner’s debt ceiling proposal hurt market confidence, and the index fell through the close.  The SPX finished just above 1330 and at the low end of the day’s trading 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 19th straight session.  The index closed above its April 2010 highs for the 162nd straight session.  The 50-day moving average has been below the 100-day moving average since July 11thThe SPX closed (by +0.41%) above its 20-day moving average (1326.53).  The index closed (by +1.58%) above its 50-day moving average for the sixth consecutive day.  The index closed (by +1.12%) above its 100-day moving average (1317.18) for the sixth consecutive day.  The SPX closed +3.82% above its 200-day moving average.  The 50-day moving average fell.  The directional momentum indicator is positive for the sixth consecutive day, but the trend is weak and declining.  Relative strength fell to 54.68 from 57.04, a neutral range.  Next resistance is at 1337.10; next support is at 1328.18.
    BKX.  On higher volume, the KBW bank index fell -0.17 points, or -0.36%, to 47.40.  Volume rose +5.02% to 64.25 million shares, up from 61.18 million shares Monday but below the 78.17 million share 50-day average.  The BKX closed +10.28% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -18.21% and -14.79% below its April 23, 2010, and February 14, 2011 closing highs, respectively.
    Financials outperformed the market, and large-cap banks outperformedregionals.  The BKX opened flat at 47.57 but fell through 10:10 in sympathy with the broader markets.  The BKX set its intra-day low of 47.22 at 10:10.  Momentum reversed, and by 11:45, the index retook its break-even line.  At 11:15, the index set its intra-day high of 47.74, up +0.35% intra-day.  By 12:30, gains retraced back to break-even, and the index crossed into negative territory at 12:45.  Finding support at 47.45, the index rallied at 2:00 back to break-even and to the 47.65 level.  Momentum faded, and the index sold-off between 3:30 and 3:45 to reach the 47.35 level.  The BKX closed on a small, snap-back rally to finish in the middle of the day’s trading range. 
    Technical indicators are mostly negativeBank stocks significantly underperformed the broader market during the May-June correction.  Recent outperformance during the market’s July rebound has resumed in recent trading.  Since the BKX’s crossed below its 50-day moving average on February 23rd, the 50-day average has provided meaningful resistance to any positive momentum.  Moving averages align bearishly.  The shortest duration averages are below the longer duration averages, and the gaps are widening.  The 50-day average (47.84) crossed below the 100- and 200-day moving averages (49.70 and 50.05, respectively) on April 25th and June 16th.  The 20-day closed (by -0.32 points) below the 50-day for the 93rd straight day, but the gap narrowed.  The 50-day moving average closed (by -2.21 points) below the 200-day moving average for the 28th straight session, and the gap widened.  The 100-day moving average closed (by -0.35 points) below the 200-day moving average for the seventh straight session, and the gap widened.  The index closed below the 20-day moving average for the 10th time in 12 sessions.  The index closed below its 50-day moving average for the 13th straight session.  The index closed below the 100- and 200-day moving averages for the 73rd and 39th consecutive sessions, respectively.  The index closed below the 50.00 level for the 38th straight session.   The directional movement indicator is negative for the second straight session.  Relative strength fell to 49.44 from 50.69, a neutral rangeNext resistance is 47.69; next support at 47.17.
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