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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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Listening to Markets
  • Economic News, Congress' Impass Send U.S. Equity Futures Lower 0 comments
    Jul 29, 2011 9:25 AM | about stocks: BAC, RF, BK, NYCB, FNFG, PBCT, NPBC, HBHC, COLB, SNV, CATY, FFBC

    This morning.  U.S. equity markets are again in correction.  Despite heightened concern and confusion regarding congressional U.S. debt ceiling approval, bond market reaction remains muted, even as equity markets become more volatile.  In Asia, equity markets closed lower, on mixed volume.  For a 4th day, European equity indexes are moderately lower.  U.S. equity futures moved lower after worse than expected 2Q2011 U.S. GDP news, but futures were already under pressure after Congress’ failure overnight to move new borrowing authority forward to the Senate, heightening a general picture of incompetence and dysfunction.  Generally, corporate earnings continue to surprise positively.  Surprisingly, U.S. Treasury prices are  higher, and the U.S. dollar is slightly stronger.  Commodities markets are lower.  Equity options markets suggest increasing market pessimism.   After a fair value adjustment of +0.07 points, September SPX equity futures are at 1285.60, down -11.77 points.  The SPX opens at 1304.89, -4.62% below its recent April 29 multi-year closing high, and -1.95% and -0.72% below its respective 20- and 50-day moving averages.  The SPX is +3.42% above its 1257.64 year-end close.  Next resistance is at 1311.61.  Next support is at 1294.45.

    Thursday, U.S. equity markets reversed morning gains to finish mostly lower on lighter volume.  Among the major averages, the Nasdaq managed a +0.05% gain, while the DJI, NYSE composite, and SPX closed off -0.51%, -0.36% and -0.32%, respectively.  Futures indicated a mixed open, with better than expected economic news tempered by debt ceiling concerns.  After the first half hour, markets turned decidedly higher, moving back above 50-day moving averages to intraday highs just after noon, when the SPX hit an intraday high of 1316.32.  As the afternoon progressed, doubts grew that the Republican leadership had the votes to pass the Speaker’s bill on for Senate dispatch.  Volatility began to climb, and spiked late in the session.  Most of the major indexes closed at their intraday lows.  The SPX barely held 1300, closing at 1300.67.  The DJI closed at 12240.11, its first close below 12300 in July.  All the major indexes are now lower in July, despite the strong earnings season.  NYSE volume fell -10.2%, 1.03x the 954.62 million share 50-day moving average volume.  Market segments ended mixed.  Technology, financials, and consumer goods ended higher.  Financials gained +0.04%.  Oil and gas, industrials, and telecommunications lagged with losses of at least -0.70%.  Financials lost -2.33%.  Volatility rose +3.31% to end at 23.74, compared to 22.98 at the prior day’s close; however, intraday, the VIX traded as low as 21.20.

    Volume was lower on all the major exchanges, leaving the recent distribution day count unchanged at 9 on the NYSE composite and 7 on the SPX and DJI, and 5 on the Nasdaq.  The BKX count is 10.  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 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.  Chinese banks fell after regulators banned commercial lenders from rolling over or renewing loans to local government financing vehicles.  In Japan, the Nikkei closed down -0.69%, on a +11.5% increase in volume.  Market segments closed mixed, with better performance from oil and gas, consumer services, and financials.  Financials gains +0.04%.  Technology, health care and telecommunications lagged and closed at least -1.16% lower.  The NKY gapped lower and subsequently traded within a narrow 40 point range, an intraday high of 9866.82 at midday, and an intraday low of 9825.34 an hour before the close.  The NKY closed at 9833.03, its 2nd consecutive close below 10000.00.  The NKY closed below its 20-, 100-, and 200-day moving averages, but +1.19% above its 50-day moving average.  It closed +5.15% above its June 17th correction low, but -3.87% below its 2010 close. 

    In China, the Hang Seng closed down -0.58%, and the Shanghai composite lost -0.26%.  In Hong Kong, volume fell -13.4%.  At the open, the index rose briefly, but lost ground on news that U.S. debt ceiling legislation was postponed.  The index fell to a 22323.2 mid-morning intraday low, found support, and trended weakly higher through the rest of the session to close at 22440.25.  Market segments closed mostly lower, with utilities gaining +1.40%, but other leaders telecommunications and financials losing ground.  Financials closed -0.42% lower.  Industrials, basic materials, and consumer goods lagged and lost at least -1.10%.  The Hang Seng is +3.89% above its June 20th correction low, but down -0.36% in 2011.  In Shanghai, trading patterns were similar.  Early strength quickly waned.  The SHCOMP hit its intraday low of 2681.27 in mid-afternoon, after which it reversed to an intraday high of 2721.53, before fading into the close.  The SHCOMP closed at 2701.73, +3.07% above its June 20th correction low.  Volume fell -0.96%.  Most market segments closed lower.  Leaders were financials, telecommunications, and utilities.  Financials rose +1.64%.  Consumer services, health care, and basic materials were the laggards.   The SHCOMP ended -11.6% below its recent April 18th 3057.33 high, -3.79% below its 2010 close, and -1.63% below its 2749.74 50-day moving average.

    In Europe, equity markets are moderately lower, with commentary focused on mixed earnings reports.  The EuroStoxx50, FTSE, and DAX are down -1.26%, -0.94%, and -0.95%, respectively.  Equity markets gapped lower, rallied through mid-morning, but weakened moving into the afternoon.  The Eurostoxx50 is at 2658.69, compared to its 2649.14 intraday low.  Market segments are mostly lower, basic materials up, though other leaders telecommunications and health care are lower.  Consumer services, financials, and utilities are the laggards.  Financial are of -1.90%.  The Eurostoxx50 is +1.99% above its recent July 18th correction low, but is off -4.76% 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 0.13315%, from 0.12375% the prior day, but down from 0.25188% at year-end.  USD 3-month LIBOR rose to +0.25550%, compared to 0.25395% the prior day, but down from 0.30950% at year-end.  The US Libor-OIS (LOIS) spread is 13.35 bps, compared to 13.24 bps the prior day and 11.98 bps at the end of 2010.  A rise in the LOIS indicates an increased intra-bank lending risk premium.  The U.S. dollar is slightly stronger against the euro and pound, but is weaker against the yen.  The dollar trades at US$74.364, below its US$74.82 50-day, US$74.95 100-day, and US$76.79 200-day moving averages.  The euro trades at US$1.4266, compared to US$1.4334 Thursday and US$1.4339 the prior day.  The euro trades above its US$1.4325 50-day and US$1.4333 100-day moving averages.  The dollar trades at ¥77.56, compared to ¥77.67 Thursday and ¥77.98 the prior day.  The yen trades better than its 50-day moving average ¥80.12.  U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.406% and 2.916%, respectively, compared to 0.418% and 2.945% Thursday.  The yield curve narrowed to +2.510%, from +2.527% 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 lower, with lower energy, precious metals, mixed aluminum and copper, and lower agriculture.

    U.S. news and economic reporting.  Economic reports focus on the initial 2Q2011 GDP read.  GDP grew +1.3% from A decline to +1.8% is expected, a slight decrease from 1.9% in 1Q2011.  Other reports include the July Chicago PMI, final University of Michigan confidence for July, and NAPM-Milwaukee.

    Overseas news:  Today, Moody’s placed Spain’s AA+ credit rating, as well as the ratings of large Spanish banks, on watch for possible downgrades.  Today, Spanish Prime Minister Zapatero confirmed early elections will be held in November.  In July, Eurozone inflation rose +2.5% over the prior year’s level, a lower increase than expected. 

     

    Company news/research:

    ·         None.

     

    2Q2011 Earnings.  The second quarter’s earnings results have so far exceed revenue and earnings expectations.  Of the 295 S&P500 companies that reported earnings to date, 78% (229 out of 295) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +5.6% (versus a historical average of +2%).  EPS is up +19.0% over the prior year.  Though challenged in the current operating environment, 85% of companies reported increased revenues over the prior year and 73% 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.  

     

    With all 24 BKX members reporting earnings, 83% (20 of 24) beat earnings estimates on an operating basis.  Revenues also exceeded expectations, with 79% of BKX members beating estimates.  For the second quarter of 2011, the BKX earned $1.12 per share, beating $0.97 estimates and compared to $0.96 and $0.61 per share in 1Q11 and 2Q10 (a +17% and +84% increase, respectively)

     

    Valuation.  The SPX trades at 13.1x estimated 2011 earnings ($99.50) and 11.5x estimated 2012 earnings ($113.53), compared to 13.3x and 11.5x 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 1.27x tangible book value, and 12.6x and 10.3x 2011 and 2012 consensus earnings, respectively, compared to 1.27x tangible book value and 12.7x/10.3x 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 +31.8% and +68.9%, respectively.

    Thursday’s equity markets. On lighter volume, the equity markets closed mixed. The Nasdaq was higher by +0.05%, while the DJI, NYSE, and SPX all fell, off -0.51%, -0.36%, and -0.32%, respectively. Market participants were noticeably on the sidelines.  Fears that the Congress will not reach some debt ceiling compromise had investors de-risking.  Markets opened higher, but sold off after Senator Harry Reid declared that even if the House passed Mr. Boehner’s bill, it would be immediately killed in the Senate.  Markets sold off through the afternoon, and volatility rose significantly into the close.

    Trading desks report a light volume and market misdirection, noting that some accounts, primarily faster accounts, were de-risking and laying out shorts in economically sensitive names.  There have not been any signs of investor capitulation.  Thursday’s positive economic news was the primary driver of the morning gains, combined with the continuing superior earning’s season.  Investors appear ready to put cash to work; however, this is all tempered by ongoing macro issues.  The SPX and 10-year treasury have moved in tandem in the last 10 trading days with about twice the normal correlation.  Bloomberg NYSE new net highs were -81 on Thursday versus the previous day’s reading of -82. The relative strength indicator fell to 42.89 from Wednesday’s 44.21 and is in the low end of a neutral range. The VIX rose to 23.74, up +3.31% from 22.98 the prior day.

    Market segments were mixed.  Technology, financials, and consumer goods were the leaders, while oil and gas, industrials, and telecommunications were the laggards.

    Financials were mixed. The XLF finished higher, up +0.07%, while the KRX and BKX closed lower, off -0.36% and -0.19%, respectively. The BKX was higher for most of the day, trading after morning gains in a relatively flattish pattern.  In the last hour, investors seemed to abandon the sector, and the index fell and closed near its low for the day.  There was a definitive lack of volume among financials with the BKX reporting a -29.7% volume decline.  The XLF recorded a volume change of -47.3%.  Traders attribute the fall off to investors remaining on the sidelines as this debt/deficit debate continues. The BKX finished with 9 names higher and 15 lower. Leaders included BAC, RF, and BK, while the laggards were NYB, FNFG, and PBCT.  The KRX finished with 19 names higher, 29 lower and 2 unchanged. Leaders included NPBC, HBHC, and COLB, while SNV,CATY and FFBC were the laggards. The BKX, KRX, and XLF finished below their 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 -20.28% below its April 2010 high and -44.03% below its best level of 82.55 in September 2008.

    Options markets.  Options markets remain mixed.  Equity options markets are slightly bullish, whereas index options markets are neutral.   The composite put/call ratio closed at 0.93 on Thursday.  The composite put/call ratio is above both its 5- and 10-period moving averages of 0.92 and 0.89, respectively.  The index put/call ratio closed at 1.11 on Thursday, declining from Wednesday’s 1.53 closing value.  The 5- and 10-period moving averages of the index put/call ratio are 1.24 and 1.18, respectively.  The equity put/call ratio closed the day at 0.70, below its 5- and 10-period moving averages of 0.62 and 0.62, respectively.

    SPX.  On lower volume, the SPX fell -4.22 points, or -0.32%, to 1300.67.  Volume fell -12.10% to 746.45 million shares, down from 849.22 million shares Wednesday but above the 730.21 million share 50-day moving average.  For the 193rd consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1310.11 vs. 1284.27, respectively).  The SPX closed above its 200-week moving average (1159.64).

    The SPX opened flat to the prior day’s close at 1305.  Through the morning, positive momentum rallied the index.  At noon, the SPX set its intra-day high of 1316.32.  By 12:45, gains retraced to the 1312 level, and the index traded sideways through 2:10.  A quick sell-off dropped the index below 1310 by 2:10 and equities fell through the close.  The SPX turned negative at 3:25, and set the intra-day low of 1299.16 at 3:48.  The index managed a small rally in trading’s final minutes to close above 1300.

    Technical indicators are neutral.  Recent sovereign debt issues, foreign and domestic, returned markets to a correction on July 27thThe SPX closed above 1300 for the 21st straight session.  The index closed above its April 2010 highs for the 164th straight session.  The 50-day moving average has been below the 100-day moving average since July 11thThe SPX closed (by -1.95%) below its 20-day moving average (1326.60) for the second straight session.  The index closed (by -0.72%) below its 50-day moving average for the second straight session.  The index closed (by -1.23%) below its 100-day moving average (1316.93) for the second straight session.  The SPX closed +1.28% above its 200-day moving average.  The 20-, 50-, and 100-day moving averages fell.  The directional momentum indicator is negative for the second straight session, and the trend is weak and stable.  Relative strength fell to 43.51 from 44.82, the lower end of a neutral range.  Next resistance is at 1311.61; next support is at 1294.45.

    BKX.  On lower volume, the KBW bank index fell -0.09 points, or -0.19%, to 46.20.  Volume fell -29.74% to 62.39 million shares, down from 88.80 million shares Wednesday and below the 78.08 million share 50-day average.  The BKX closed +7.49% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -20.28% and -16.95% below its April 23, 2010, and February 14, 2011 closing highs, respectively.

    Financials outperformed the market, and large-cap banks outperformed regionals.  The BKX gapped higher at the open to the 46.50 level and rallied to 46.70 by 9:35.  Through 10:45, the index traded in a 46.50 - 46.70 range before a rally at 10:45 lifted financials to their intra-day high of 46.81 at 11:25.  By 12:45, gains retraced to the 46.60 level.  The BKX traded relatively flat through 2:15.  The broader market sell-off hit financials and dropped the index to the 46.40 level by 2:30.  At 2:55, a small rally was sold and the index continued falling through the close.  At 3:30, the BKX turned negative on the day and at 3:45, the index reached its intra-day low of 46.13.  A small rally at the close lifted the index to the 46.20 level at the bell. 

    Technical indicators are negativeBank stocks significantly underperformed the broader market during the May-June correction.  Recent outperformance during the market’s July rebound was short lived, as foreign and domestic sovereign debt fears returned markets to a correction on July 27th.  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, the gaps are widening, and all major averages are falling.  The 50-day average (47.69) crossed below the 100- and 200-day moving averages (49.57 and 50.04, respectively) on April 25th and June 16th.  The 20-day closed (by -0.31 points) below the 50-day for the 95th straight day, and the gap expanded.  The 50-day moving average closed (by -2.35 points) below the 200-day moving average for the 31st straight session, and the gap widened.  The 100-day moving average closed (by -0.47 points) below the 200-day moving average for the ninth straight session, and the gap widened.  The index closed below the 20-day moving average for the 12th time in 14 sessions.  The index closed below its 50-day moving average for the 15th straight session.  The index closed below the 100- and 200-day moving averages for the 75th and 41st consecutive sessions, respectively.  The index closed below the 50.00 level for the 40th straight session.  The directional movement indicator is negative for the fourth straight session.  Relative strength fell to 41.63 from 42.17, the lower end of a neutral rangeNext resistance is 46.63; next support at 45.95.

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