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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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GBT Capital Management LLC
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Listening to Markets
  • U.S. Futures Edge Higher on Better Retail Sales 0 comments
    Aug 12, 2011 9:24 AM | about stocks: COF, HIG, GNW, MS, HBAN, KEY, NYCB, CBSH, NTRS, CMA, CATY, FCF, WBS, FMBI, FFBC, SIVB
    This morning.  U.S. equity markets are in correction, but yesterday’s gains again suggest the possibility of a renewed upturn should markets follow-through next week.  This morning, U.S. equity futures markets are moderately higher and trending higher in the pre-market.  In Asia, equity markets closed mixed, on lower volume.  European equity indexes are substantially higher, including the UK and Germany, where authorities have not imposed short-sale restrictions. LIBO has drifted higher, though LOIS continues to indicate that interbank risk premiums remain low. U.S. Treasury prices are slightly higher.  The U.S. dollar is slightly lower.  Commodities markets are mixed.  Equity options markets suggest a generally neutral short-term outlook.  After a fair value adjustment of +1.54 points, September SPX equity futures are at 1177.20, up +7.66 points.  The SPX opens at 1172.64, -14.0% below its recent April 29 multi-year closing high, and -7.36% and -8.81% below its respective 20- and 50-day moving averages.  The SPX is -6.76% below its 1257.64 year-end close.  Next resistance is at 1198.85.  Next support is at 1133.86.
    Thursday.  Equity market volatility remains elevated. Markets continued their violent swings, but rebounded from Wednesday’s substantial losses to post even greater gains. Pre-market, futures swung from positive to negative and finally back to positive in front of the open, helped by a slightly better initial jobless claims report at 8:30 and continued strong 2Q2011 earnings reports. After the open, initial strength was sold, but after 10:00, markets found their footing, and began a long rally that finally peaked in the final half-hour of the session. NYSE volume declined -12.2%, but remained elevated at 1.68x its 50-day moving average.  All major indexes ended at least +3.95% higher. The Nasdaq gained +4.69%, followed by the SPX, NYSE composite, and DJI, with gains of +4.63%, +4.60%, and 3.95%, respectively.  The SPX closed at 1172.64, compared to Wednesday’s 1120.76 close, and above Tuesdays 1171.77 close. All market segments closed at least +2.58% higher, lead by financials, basic materials, and oil and gas. Consumer services, consumer goods, and telecommunications were the worst performers.  Financials rose +6.28%. Volatility was again volatile to the downside, with the VIX falling -9.28% to end at 39.00, from 42.99 the prior day.
    Total distribution days were unchanged at 9 on the NYSE composite and 8 on the SPX, DJI, and Nasdaq.  The BKX count is 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 mixed on lower volume, and generally saw their intraday highs shortly after their respective opens.  In Japan, the Nikkei closed at 8963.72, down -0.20%, despite the exceptional U.S. rebound overnight. Traders cited the Japanese government’s cut in its growth forecast and Eurozone sovereign debt concerns. The 9070.27 intraday high was set at the open, trending lower through the morning session to a sideways trade through the afternoon.  Volume fell -7.36%.  Market segments were mixed, with consumer services, oil and gas, and health care posting the best gains. Industrials, consumer goods and financials were the laggards, with financials ending down -1.13%. The NKY closed below all moving averages.  It closed -12.4% below its 2010 close. 
    In China, the Hang Seng and Shanghai composite closed up +0.13% and +0.45%, respectively.  Traders cited better U.S. economic reports. In Hong Kong, volume fell -21.5%.  Market segments closed mixed, led by consumer goods, technology, and consumer services. Telecommunications, oil and gas, and basic materials were the laggards. As in Japan, the HSI gapped to its 19955.8 intraday high, but without conviction, and generally weakened through the day to a late afternoon 19575.0 intraday low, before closing at 19620.01. In Shanghai, the SHCOMP gapped higher, but held its gains better than other Asian markets, to a mid-morning 2605.45 intraday high. The afternoon was more muted, trading sideways to a 2593.17 close.  Except financials, all market segments gained, led by technology, industrials, and consumer services. Oil and gas, basic materials, and financials lagged. The SHCOMP ended -15.2% below its recent April 18th 3057.33 high, -7.65% below its 2010 close, and -4.62% below its 2722.02 50-day moving average.
    In Europe, equity markets are strong, though on much weaker volume, after most Eurozone countries (except the UK) adopted restrictions on short sales. Stocks initially sold off, but rallied after the open to mid-morning intraday highs.  Markets subsequently weakened, but are rallying again at mid-day, though still below earlier highs. The Eurostoxx50, DAX, and FTSE are up +2.54%, +1.55%, and 2.31%, respectively. After initial weakness, the Eurostoxx50 set a mid-morning intraday high of 2283.70 (compared to the prior 2215.45 close). All market segments are at least +1.34% higher. Industrials, financials, and health care are up at least +3.14%. Technology, technology, and basic materials are lagging, but up at least +1.34%.
    Libor, LOIS, Currencies, Treasuries, Commodities:
    ·         Interbank lending rates are now showing greater stress, perhaps in response to market volatility and expanded concerns regarding the health Eurozone banks in a stressed economic environment.  Overnight USD LIBOR rose to 0.14278%, from 0.13944%, but down from 0.25188% at year-end.  USD 3-month LIBOR rose to 0.29006%, compared to 0.28617% the prior day, but down from 0.30950% at year-end. 
    ·         The US Libor-OIS (LOIS) spread rose to 9.50 bps, compared to 9.30 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. government overnight repo rate is 8 bps, up from 5 bps the prior day, but well off from a recent high of 33 bps on August 2nd.
    ·         The U.S. dollar is slightly weaker against the euro, pound, and yen.  The dollar trades at US$74.539, compared to US$74.677 the prior day, and below its US$74.714 50-day, US$74.803 100-day, and US$76.663 200-day moving averages.  The euro trades at US$1.4246, compared to US$1.4241 Thursday and US$1.4178 the prior day.  The euro trades below its US$1.4318 50-day and US$1.4349 100-day moving averages.  In Japan, the dollar trades at ¥76.57, compared to ¥76.84 Thursday and ¥76.86 the prior day.  The yen trades better than its 50-day moving average ¥79.331.
    ·         U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.179% and 2.287%, respectively, compared to 0.184% and 2.340% Thursday.  The yield curve widened to +2.108%, from +2.156% 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 mixed petroleum, lower precious metals, higher aluminum and copper, and mixed agriculture prices.
    U.S. news and economic reporting.  Economic reporting includes July retail sales at 8:30, followed by the preliminary August University of Michigan confidence report and June business inventories at 10:00. Retails sales were in line at +0.5%, compared to survey +0.5% and revised +0.3% prior. Ex-auto and gas, retail sales were +0.5%, compared to survey +0.3%. Prior was revised to +0.3% from +0.0%.
    Overseas news: Last evening, France, Italy, Spain and Belgium banned short sales on financial companies for the next 15 trading days.  In the second quarter, France’s GDP showed no growth over the prior quarter, missing estimates for a +0.3% increase. 
     
    Company news/research:
    ·         COF – raised to outperform at RBC Capital, price target increased to $56 from $49
     
    2Q2011 Earnings.  The second quarter’s earnings results have so far exceed revenue and earnings expectations.  Of the 433 S&P500 companies that reported earnings to date, 76% (328 out of 433) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +5.2% (versus a historical average of +2%).  EPS is up +17.2% 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 11.8x estimated 2011 earnings ($99.27) and 10.3x estimated 2012 earnings ($113.50), compared to 11.3x and 9.9x 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 +4.9%, and +5.8%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.1% and +33.9%, respectively.
    Large-cap banks trade at a median 1.15x tangible book value, and 10.8x and 8.4x 2011 and 2012 consensus earnings, respectively, compared to 1.07x tangible book value and 10.2x/8.0x 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 +30.8% and +68.9%, respectively.
    Options.  Options markets are neutral.  Composite options markets are neutral, equity options markets are neutral to bearish, and index options markets are neutral.   The composite put/call ratio closed at 1.02, below its 5- and 10-period moving averages of 1.22 and 1.22, respectively.  The index put/call ratio closed at 1.35, below the 5- and 10-period moving averages of 1.51 and 1.50, respectively.  The equity put/call ratio closed the day at 0.65, below its 5- and 10-period moving averages of 0.87 and 0.83, respectively.
    Thursday’s equity markets.  On reduced but still strong volume, equity markets finished higher.  The Nasdaq, SPX, NYSE, and DJI all finished higher, up +4.69%, +4.63%, +4.60%, and +3.95%, respectively.  Markets began the day indicated slightly higher, after initial jobless claims were slightly better than expected, but below 400K for the 1st time since April 1st, and continuing claims fell below 3700k for the first time since May.  Markets gained through the morning, helped by incremental news from Europe about a possible ban on short selling.  As the rally continued, it strengthened through the afternoon until the final 20 minutes. The last hour saw the highs for the day, with a small selloff in the last half hour as short-term traders took profits.  The keys to Thursday’s market movement were less pessimism from Europe, a potential Eurozone ban on short selling in financials, and improved U.S. jobless numbers.
    Trading desks were better buyers through the day.  They reported that investors are lightly buying stocks where valuations had become compelling. Faster accounts continue to dominate the swings and were active Thursday, though primarily covering shorts laid out the previous week.  The bias continues to be to de-risk economically sensitive names.  Short sellers, while there, fail to press their shorts in such an oversold market. Whereas Wednesday seemed to be a buyers’ strike, Thursday seemed to be a sellers’ strike, but short-covering was an obvious element. Bloomberg NYSE new net highs were -120 versus the previous day’s reading of -186. The relative strength indicator rose to 36.80 versus Wednesday’s reading of 26.57 and reflects a market that is oversold.
    All market segments were positive.  Financials, basic materials, and oil and gas were the leaders, while consumer services, consumer goods, and telecommunications were the laggards.
    Financials gained back some of the losses of recent sessions. The BKX, XLF, and KRX were up +6.14%, +5.58%, and +5.48% respectively. The BKX was higher from the open and gained through the session, closing near its highs.  Among broader financials, HIG, GNW, and MS were the leaders, up at least +10.7%.  The BKX finished the day with all 24 names higher.  Leaders in the BKX included HBAN, KEY, and NYB, up at least +8.02%.  The laggards in the BKX were CBSH, NTRS, and CMA.  The KRX finished the day with all 50 names higher.  Leaders in the KRX were CATY, FCF, and WBS, while the laggards were FMBI, FFBC, and SIVB. The financials have been under pressure as investors have sold this economically sensitive group. This, plus concerns of a potential funding crisis among some European banks, have caused multiple compression to levels last seen in early 2009.  Financial trading desks reported that buyers were better by a 2-1 margin.  Sellers moved to the sidelines, which helps to explain Thursday’s outsized gains. The BKX, KRX, and XLF all finished below their 50-, 100-, and 200-day and 200-week moving averages. While the broader indexes have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -33.46% below its April 2010 high and -53.9% below its best level of 82.55 in September 2008.
    NYSE Indicators.  Volume fell -12.2% to 1.885 billion shares, from 2.410 billion shares Tuesday, 1.68x the 1.121 billion share 50-day moving average.  By large margins, market breadth was positive, and up volume led down volume.  Advancing stocks lagged decliners by 2602 (compared to -1500 the prior day), or 11.5:1.  Up volume trailed down volume by 39.3:1.
    SPX. On lower but comparatively large volume, the SPX rose +49.88 points, or +4.63%, to 1172.64.  Volume fell -11.19% to 1,530 million shares, down from 1,723 million shares Wednesday but still 1.8x the 861.20 million share 50-day moving average.  For the 203rd consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1285.91 vs. 1285.71 respectively), but a cross to the downside will likely occur after today’s close.  The SPX closed above its 200-week moving average (1155.86).
    The SPX gapped higher at the open, immediately setting the intra-day low of 1125.80.  Within five minutes, a rally took the index to 1140.  Selling retraced the rally to the 1128 level.  At 9:55, a second, stronger rally began which lifted the index through 10:50 to the 1155 level.  Through 12:45, the 1155 level provided meaningful resistance.  Another rally at 12:30 finally broke through that level by 12:45, and the index reached 1165 by 1:00.  Two more rallies at 1:45 and 2:45 lifted the index by 10 points each, through the 1170 and 1180 levels, respectively.  At 3:46, the index climbed to its intra-day high of 1186.29.  Profit taking or renewed shorting at the close retraced gains back to 1170, and the index closed above that level.   
    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 10th straight session and below 1200 for the fifth straight time.  The index closed below its April 2010 highs for the sixth straight session.  The 50-day moving average has been below the 100-day moving average since July 11thThe SPX closed (by -7.36%) below its 20-day moving average (1265.82) for the 12th straight session.  The index closed (by -8.81%) below its 50-day moving average for the 12th straight session.  The index closed (by -10.38%) below its 100-day moving average (1308.43) for the 11th straight session.  The SPX closed -8.79% below its 200-day moving average, closing below that average for the seventh straight session.  All moving averages fell.  The directional momentum indicator is negative for the 11th straight session, and the trend is strong and increasing.  Relative strength rose to 37.44 from 26.59, the low end of a neutral range.  Next resistance is at 1198.85; next support is at 1133.86.
    BKX.  On lower volume, the KBW bank index rose +2.23 points, or +6.14%, to 38.56, its sixth close below the prior 52-week low of 42.70 from August 25, 2010 and its fourth straight sub-40 close.  Volume fell -14.13% to 171.02 million shares, down from 199.15 million shares Wednesday, but still 1.8x the 96.16 million share 50-day average.  The BKX closed -10.28% below its August 30 closing low of 42.98, the trough of the recent prior correction, -33.46% and -30.68% below its April 23, 2010, and February 14, 2011 closing highs, respectively.
    Financials were the market’s best performing segment, large-cap banks outperformed regional banks.  The BKX mirrored broader market activity.  The recent close correlation between the BKX and the broader market suggest most trading activity is futures or fund-basket driven.  BKX gapped higher at the open and rallied to the 37.50 level by 9:35.  The ensuing sell-off took the index to its intra-day low of 36.72, still in positive territory.  Through 10:55, the index rallied to the 37.75 level before retracing gains back to 35.45.  The index traded flat through 12:30, when a rally lifted financials through the afternoon.  The BKX climbed steadily through 3:45, reaching the intra-day high of 39.03 at 3:45.  A sell-off in trading’s final 15 minutes retraced gains to the 38.50 level, where the index closed.   
    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 (46.13) crossed below the 100- and 200-day moving averages (48.54 and 49.83, respectively) on April 25th and June 16th.  The 20-day closed (by -1.89 points) below the 50-day for the 105th straight day, and the gap expanded.  The 50-day moving average closed (by -3.70 points) below the 200-day moving average for the 41st straight session, and the gap expanded.  The 100-day moving average closed (by -1.30 points) below the 200-day moving average for the 19th straight session, and the gap expanded.  The index closed below the 20-day moving average for the 22nd time in 23 sessions.  The index closed below its 50-, 100-, and 200-day moving average for the 25th, 85th, and 51st consecutive sessions, respectively.  The index closed below the 50.00 level for the 50th straight session and below 40 for the fourth straight session.  The directional movement indicator is negative for the 13th straight session, and the trend is strong and increasing.  Relative strength rose to 33.71 from 24.29, the low end of a neutral range.  Next resistance is 39.51; next support at 37.12.
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