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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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  • Futures Sharply Lower After S&P Downgrades U.S. Long-Term Debt 0 comments
    Aug 8, 2011 9:02 AM | about stocks: CYN, C, RF, BAC, STBA, UMPQ, SNV, SIVB, FHN
    This morning.  U.S. equity markets are in correction.  U.S. equity futures markets are sharply lower.  In Asia, equity markets closed lower, on mixed volume, but with all segments lower.  European equity indexes are moderately lower, but segments are mixed.  Despite S&P’s downgrade of long-term U.S. debt, U.S. Treasury prices are higher. The U.S. dollar is mixed. Commodities markets are mostly lower.  Equity options markets suggest a pessimistic market outlook.  After a fair value adjustment of -1.82 points, September SPX equity futures are at 1167.50, down -29.48 points.  The SPX opens at 1199.38, -12.0% below its recent April 29 multi-year closing high, and -7.71% and -7.78% below its respective 20- and 50-day moving averages.  The SPX is -4.63% below its 1257.64 year-end close.  Next resistance is at 1222.30.  Next support is at 1172.28.
    Friday, U.S. equity markets were volatile, gapping higher at the open, but quickly trading lower through mid-day, before staging an impressive afternoon rally that faded into the close. Volume rose +23.8%. The major indexes ended mixed, with the DJI up +0.54%, while the SPX, NYSE composite, and Nasdaq closed -0.06%, -0.13%, and -0.94% lower. The SPX closed below 1200 for the 1st time since November 30th. The DJI closed at 11,44.61, its 3rd consecutive sub-12,000 close.  NYSE volume rose +23.8% to 2.254 billion shares, 2.20x the 50-day moving average.  Most market segments closed higher, led by consumer goods, health care, and utilities. Technology, basic materials, and financials closed lower. Volatility was itself volatile. The VIX ended at 32.0, up 1.07% from 31.66 at the prior close, but varied from a low of 27.54 to an intraday high of 39.25.
    Total distribution days number 8 on the NYSE composite and 7 on the SPX and DJI. The Nasdaq volume rose, increasing distribution days to 8.  The BKX count rose to 12.   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 correction.  Markets closed sharply lower on mixed volume.  In Japan, the Nikkei closed down -2.18%. Volume fell -24.1%.  All market segments closed at least -1.50% lower. Health care, telecommunications, and technology were the segment leaders. Utilities, industrials, and financials were the laggards, with financials ending off -2.97%.  The NKY gapped lower and trended down to an intraday low of 9057.29 in mid-afternoon. The index rallied weakly to close at 9097.56. The NKY closed below all moving averages.  It closed -11.1% below its 2010 close.
    In China, the Hang Seng and Shanghai composite closed down -2.17% and -3.79%, respectively. In Hong Kong, volume fell -24.1%.  In Shanghai, volume rose +40.0%. In both, all market segments were lower. In Hong Kong, utilities, consumer goods, and consumer services were segment leaders. Industrials, technology, and oil and gas were the laggards. The Hang Seng gapped lower, and traded to an intraday low of 20044.40 at mid-day. Interestingly, the Hang Seng rallied into the close, closing at 20490.57, about 90 points above the open. Financials lost -2.13%.  The SHCOMP also gapped lower, but held ground through the first hour before plummeting to an intraday low of 2497.92. The SHCOMP traded sideways through the afternoon to end at 2526.82, down -10.0% in 2011. Best segment performers were financials, oil and gas, and consumer goods. Financials lost -2.77%. Telecommunications, consumer services, and industrials were the laggards.  The SHCOMP ended -17.4% below its recent April 18th 3057.33 high, -10.0% below its 2010 close, and -7.55% below its 2733.18 50-day moving average.
    In Europe, equity markets initially traded higher, but subsequently lost ground and are now lower in a mixed trade.  The Eurostoxx50, DAX, and FTSE are down -1.06%, -1.83%, and -2.57%, respectively.  The Eurostoxx50 opened at 2345.57, but briefly touched an intraday high of 2428.55, before selling to a mid-morning intraday low of 2331.97. Utilities, telecommunications, and financials are at least +0.40% higher. Basic materials, consumer goods, and industrials are at least -2.50% lower. The Eurostoxx50 now setting lower correction lows and is off -16.0% in 2011.
    The S&P downgrade of U.S. debt has had relatively little impact on interbank lending rates. Overnight USD LIBOR is unchanged at 0.13611%, compared to 0.13611% the prior day, and 0.25188% at year-end.  USD 3-month LIBOR rose to 0.27478%, compared to 0.27161% the prior day, but down from 0.30950% at year-end.  The US Libor-OIS (LOIS) spread rose slightly to 8.80 bps, compared to 8.65 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.  U.S. government overnight repo rates retreated to 7 bps, from 9 bps Friday, and 33 bps last Tuesday. The U.S. dollar is stronger against the euro, but weaker against the pound and yen.  The dollar trades at US$74.509, below its US$74.688 50-day, US$74.847 100-day, and US$76.698 200-day moving averages.  The euro trades at US$1.4249, compared to US$1.4282 Friday and US$1.4092 the prior day.  The euro trades below its US$1.4336 50-day and US$1.4345 100-day moving averages.  Intervention by Japanese monetary authorities has been ineffective, as the dollar trades at ¥77.79, compared to ¥78.40 Friday and ¥78.89 the prior day.  The yen trades better than its 50-day moving average ¥79.661.  Despite S&P action, U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.256% and 2.470%, respectively, compared to 0.288% and 2.558% Friday.  The yield curve narrowed to +2.214%, from +2.270% 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 petroleum, higher precious metals, lower aluminum and copper, and lower agriculture prices.
    U.S. news and economic reporting.  There is no economic reporting today. The FOMC begins a two-day meeting tomorrow.
    Overseas news: Last evening, the European Central Bank issued a communiqué stating it would “actively implement” its Securities Market Program fund to purchase sovereign bonds.  Today, the Chinese yuan hit a record of 6.4268 per dollar, appreciating +6.21% since de-pegging from the dollar in June 2010. 
     
    Company news/research:
    ·         CYN – raised to buy at Sandler O’Neill, price target of $55
     
    2Q2011 Earnings.  The second quarter’s earnings results have so far exceed revenue and earnings expectations.  Of the 414 S&P500 companies that reported earnings to date, 76% (313 out of 414) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +5.1% (versus a historical average of +2%).  EPS is up +17.6% over the prior year.  Though challenged in the current operating environment, 84% of companies reported increased revenues over the prior year and 71% 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, 88% (21 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 12.0x estimated 2011 earnings ($99.75) and 10.6x estimated 2012 earnings ($113.43), compared to 12.0x and 10.6x respective 2011-12 earnings Friday.  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 +5.7%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.7% and +33.8%, respectively.
     
    Large-cap banks trade at a median 1.18x tangible book value, and 11.3x and 9.2x 2011 and 2012 consensus earnings, respectively, compared to 1.19x tangible book value and 11.6x/9.4x 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.
    Friday’s equity markets.  On increased volume, the equity markets finished mixed.  The DJI gained, finishing up +0.54%, while the Nasdaq, NYSE, and SPX all fell, off by -0.94%, -0.13%, and -0.06%, respectively.  Markets began the day indicated lower, but reversed course after the 8:30 economic data release showing a better than expected change in non-farm payrolls.  The unemployment rate dropped from 9.2% to 9.1%. Workers average hourly earnings also grew month over month which bodes well for spending.  Markets opened the day higher, but in the next hour gave back their gains as investors focused on more macro issues, including the European debt crisis and whether US debt would be downgraded by S&P.  Markets reached their lows just before noon.  A speech by Italian Prime Minister Berlusconi, who vowed to balance the budget and impose austerity measures faster than planned, helped spur markets higher. Investors understood this speech as a signal to the ECB that Italy is willing to do what it takes to move out of their current debt crisis. The afternoon trade was rather flattish, hugging the gain/loss line as investors moved to the sidelines in front of the weekend.
    Trading desks report calm and orderly selling over the past few days with large accounts de-risking in all sectors including some of the “safer havens”.  Short sellers were present, but not  aggressive in extending their positions.  The bulk of the trading and volume is driven by faster accounts who are taking advantage of the past 10 days’ market volatility.  Buyers have primarily been shorts covering and some longer-term accounts scaling in names that they own.  We heard that some financial desks were 3 to 1 better to buy on Friday, but received no indication whether this was short covering or value hunting.  The Bloomberg NYSE new net highs were -604 versus the previous reading of -412.  New net highs have not seen a -600 reading since March 2009.  The relative strength indicator fell to 22.45 from the previous day’s reading of 22.61 and is in the oversold range.  The VIX finished the day at 32.00, up +1.07%.
    Market segments were mixed. Consumer goods, health care, and utilities were the leaders, while technology, basic materials, and financials were the laggards.
    Financials were the worst performing sector. The BKX, XLF, and KRX were all lower, off -2.17%, -1.90%, and -1.72%, respectively. The BKX, which began the day higher, fell with the rest of the market, but never truly recovered through the day. The laggards in the BKX were C, RF, and BAC.  BAC was down the most, off -7.47% and led all financials lower.  The BKX finished with 2 names higher and 22 lower.  The KRX finished the day with 4 names higher and 46 lower.  Leaders in the KRX were STBA, UMPQ, and PRK. Laggards in the index were SNV, SIVB, and FHN. Investors continue to de-risk.  We have heard that longer-term value investors are beginning to buy in certain names, as valuations sink to absurd levels. We have not heard of any aggressive short selling at these levels, a possible sign of a snapback rally.  The BKX, KRX, and XLF all 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 -28.53% below its April 2010 high and -49.82% below its best level of 82.55 in September 2008.
    Options.  Options markets are mixed, with equity options bullish, whereas index options markets are bearish.   The composite put/call ratio closed at 1.24 on Friday.  The composite put/call ratio is above both its 5- and 10-period moving averages of 1.23 and 1.11, respectively.  The index put/call ratio closed at 1.38, below the 5- and 10-period moving averages of 1.48 and 1.40, respectively.  The equity put/call ratio closed the day at 0.93, well above its 5- and 10-period moving averages of 0.83 and 0.75, respectively.
    SPX.  On the highest volume of the year, the SPX fell -0.69 points, or -0.06%, to 1199.38.  Volume surged +29.22% to 1,724 million shares, up from 1,334 million shares Thursday and more than 2.2x the 781.50 million share 50-day moving average.  For the 199th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1300.54 vs. 1286.45 respectively).  The SPX closed above its 200-week moving average (1157.81).
    Despite closing only a fraction of a point lower, the SPX traded over a 50 point range during the day, which followed Thursday’s 60-point trading range.  The SPX gapped higher at the open to the 1210 level, spurred upward by a better-than-feared U.S. payrolls report.  At 9:34, the index set its intra-day high of 1218.11.  Momentum turned negative rapidly.  By 9:50, the index retraced gains back to the 1200-level break-even line.  By 10:00, the index fell to 1190.  Through 10:30, the index rallied back into positive territory and the 1205 level, but the rally was sold.  Through 12:00, the index fell through 1190, 1180, and 1170, and reached its low of 1168.09 at 11:57.  At noon, signs of capitulation emerged.  The European Central Bank moved to purchase Spanish and Italian debt in the markets while Italian Prime Minister Berlusconi held a press conference pushing for constitutional spending constraints.  Within 15 minutes, the SPX rallied to the 1195 level.  At 12:20, the index consolidated its move higher, and at 12:30, the index surged another 27 points positive territory and the 1212 level.  Through 3:00, the market traded mostly sideways between break-even and 1215.  A 3:00 sell-off to the 1190 level was bought, and the index returned to its break-even line by 3:45.  The index closed with a marginal loss after a volatile session. 
    Technical indicators are negative.  Recent sovereign debt issues, foreign and domestic, returned markets to a correction on July 27thThe SPX closed below 1300 for the sixth straight session and below 1200 for the first time since November 30, 2010.  The index closed below its April 2010 highs for the second straight session.  The 50-day moving average has been below the 100-day moving average since July 11thThe SPX closed (by -7.71%) below its 20-day moving average (1299.53) for the eighth straight session.  The index closed (by -7.78%) below its 50-day moving average for the eighth straight session.  The index closed (by -8.70%) below its 100-day moving average (1313.66) for the seventh straight session.  The SPX closed -6.77% below its 200-day moving average, closing below that average for the third straight session.  The 20-, 50-, and 100-day moving averages fell.  The directional momentum indicator is negative for the seventh straight session, and the trend is strong and increasing.  Relative strength fell to 23.90 from 23.99, an oversold range and the lowest level since October 10, 2008.  Next resistance is at 1222.30; next support is at 1172.28.
    BKX.  On higher volume, the KBW bank index fell -0.92 points, or -2.17%, to 41.42, its second close below the prior 52-week low of 42.70 from August 25, 2010 and the lowest closing level since July 31st, 2009.  Volume rose +64.64% to 214.65 million shares, up from 130.38 million shares Thursday and 2.5x the 84.79 million share 50-day average.  The BKX closed -3.63% below its August 30 closing low of 42.98, the trough of the recent prior correction, -28.52% and -25.54% below its April 23, 2010, and February 14, 2011 closing highs, respectively.
    Financials were the market’s worst performing segment, large-cap banks outperformed regional banks.  Through the morning, the BKX traded almost in lock-step with the broader markets.  The BKX opened higher and set the intra-day high of 43.10 at 9:33.  By 9:50, the index retraced to break-even, and by 10:00, the index sold off to under 42.00.  Through 11:00, the index fluctuated between the 42.00 level and the 42.35 break-even line.  At 11:00, the BKX sold off in conjunction with the broader markets and set the intra-day low of 40.76 at 11:57, a -5.43% move from the intra-day high.  Quickly, financials reversed momentum and rallied to 42.00 at 12:15 and retook break-even by 12:50.  Positive momentum waned, and the BKX diverged to the downside of the broader markets through the afternoon.  At 2:45, the index sold-off from the 41.80 level down to 41.05, and only modestly recovered that sell-off into the close to finish well behind the broader market’s overall flat performance.   
    Technical indicators are negativeBank stocks significantly underperformed the broader market during the May-June correction.  Foreign and domestic sovereign debt fears returned markets to a correction on July 27th and banks have reassumed their loss leadership.  Since the BKX 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 (47.04) crossed below the 100- and 200-day moving averages (49.09 and 49.99, respectively) on April 25th and June 16th.  The 20-day closed (by -1.01 points) below the 50-day for the 101st straight day, and the gap expanded.  The 50-day moving average closed (by -2.95 points) below the 200-day moving average for the 37th straight session, and the gap expanded.  The 100-day moving average closed (by -0.89 points) below the 200-day moving average for the 15th straight session, and the gap expanded.  The index closed below the 20-day moving average for the 18th time in 20 sessions.  The index closed below its 50-, 100-, and 200-day moving average for the 21st, 81st, and 47th consecutive sessions, respectively.  The index closed below the 50.00 level for the 46th straight session.  The directional movement indicator is negative for the ninth straight session, and the trend is strong and increasing.  Relative strength fell to 22.90 from 25.42, an oversold range and its lowest level since inauguration day 2009.  Next resistance is 42.76; next support at 40.42.
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