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U.S. Futures Mixed, Markets Tire as September Begins

|Includes:ASB, BBT, BCS, BK, BXS, CBG, CMA, E*TRADE Financial Corporation (ETFC), FFBC, FNFG, GS, HBHC, NTRS, NYCB, UBSI, VLY, WFC
This morning.  U.S. equity markets are in a confirmed uptrend.  U.S. equity futures are modestly higher, recovering from moderate earlier losses. lower, after several days’ consecutive gains, mixed Asian equity results, and lower European trading. U.S. Treasury prices are higher.  Overall trading patterns suggest an improving outlook.  LIBO markets suggest heightened interbank lending credit concerns.  Euribor-OIS spreads are trending higher.  The U.S. dollar is stronger.  Commodities markets are mostly lower.  Equity options markets suggest a neutral to bearish short-term outlook.  After a fair value adjustment of +0.09 points, September SPX equity futures are at 1217.60, up -1.29 points.  The SPX opens at 1218.89, -10.6% below its recent April 29 multi-year closing high, and +3.91% above its 20-day moving average, but -2.97% below its 50-day moving average.  The SPX is -3.08% below its 1257.64 year-end close.  Next resistance is at 1229.95.  Next support is at 1208.59.
Wednesday.  On increased volume, strong early results were sold through the day, falling briefly into the negative until a late rally pulled all the major indices back to moderate gains. At the open, equities moved higher, but added to gains after the 9:45 and 10:00 releases of better than expected Chicago PMI and Milwaukee purchasing managers’ reports. The SPX hit its intraday high of 1230.71 at 10:30, when the Justice Department announced that it opposed the merger of AT&T and T-Mobile. Indexes attempted to rally after noon, but trended lower after 1:00, with all the major indexes dipping back into losses before reversing and rallying in the final 45 minutes. The NYSE composite added +0.86%, followed by the SPX, DJI, and Nasdaq,  which added +0.49%, +0.46%, and +0.13%, respectively.  Most market segments closed higher, led by financials, utilities, and oil and gas, which closed at least +0.67% higher.  Basic materials, technology, and telecommunications were the laggards, with the latter down -1.60%. Intraday put/call ratios traded opened at 0.59 and closed at 0.66.  Volatility continued to trend lower, with the VIX closing at 31.62, down -3.86%.
Last recent confirmation of an equity uptrend reset the distribution day count.  Based on Thursday’s losses, the distribution day count is 1 on the DJI and NYSE composite.  Financials have led the recent rally. The BKX distribution day count is 0. Distribution days signal institutional selling in the prior 25 trading days, or since the commencement of the most recent uptrend.  An accumulation of distribution days signal a weakening of an uptrend and increased probability that an uptrend will come under pressure or that a correction will ensue.
In Asia, Japanese and Chinese equity markets closed mixed, with the best result in Japan. Volume fell. Traders attributed the mixed trade to encouraging U.S. economic reports and strengthening Chinese manufacturing results.
In Japan, the Nikkei closed at 9060.80, up +1.18% on a -7.35% decrease in volume. The index gapped higher and rallied through the morning to a 9098.15 intraday high , then trended lower but found support at 9035 and rallied into the close. Most market segments gained, led by consumer goods, telecommunications, and industrials, which rose at least +1.62%. Financials rose +1.22%. Health care, oil and gas, and utilities were the laggards, with the latter two off -01.12% and -0.26%, respectively. The NKY closed below all moving averages and -11.4% below its 2010 close, but +5.01% over its recent 8628.13 August 22nd closing low.
In China, the Hang Seng and Shanghai composite closed up +0.25%% and down -0.44%, respectively.  HSI volume fell -25.0%, while SHCOMP volume fell -2.91%.  In Hong Kong, the HSI gapped higher and rose to a mid-morning intraday high of 20975.3 before trending lower through the rest of the session, giving back most of the early gains. The HSI closed at 20585.33. Most market segments gained, led by consumer goods, technology, and telecommunications. Consumer services, financials, and oil and gas were the laggards. Financials gave up -0.06% and oil and gas fell -0.22%. The HSI closed -10.6% below its 2010 close, but +6.11% above its 19.399.92 August 19th recent closing low.  In Shanghai, the SHCOMP also opened slightly higher, but traded sideways until a brief mid-morning rally carried the index to its 2584.80 intraday high. The index turned lower and generally trended lower through the session’s remainder, ending at 2556.04. Most market segments ended lower. The exception was telecommunications, which gained +1.07%. Financials and technology were the other leaders, but ended with small losses. Consumer services, consumer goods, and health care were the laggards, with losses of at least -0.97%. The SHCOMP ended -16.4% below its April 18th 3057.33 high, -8.98% below its 2010 close, and -4.85% below its 2687.93 50-day moving average. It is +1.60% above its recent 2515.86 August 22nd closing low.
In Europe, equity markets are lower, but off the day’s intraday lows. The Eurostoxx50, FTSE, and DAX are down -0.76%, -0.23%, and -1.39%, respectively. On the EuroStoxx50, market segments are mixed, led by gains in technology, oil and gas, and health care, up at least +0.26%.  Industrials, financials, and utilities are lagging, down at least -1.19%.  
Libor, LOIS, Currencies, Treasuries, Commodities:
·         Interbank lending rates show increased stress, as concerns heighten regarding the health of Eurozone banks in a stressed economic environment.  Overnight USD LIBOR fell to 0.14222%, from 0.14667% Wednesday, but down from 0.25188% at year-end.  USD 3-month LIBOR rose to 0.32944%, compared to 0.32722% Wednesday, and above the 0.30950% year-end rate.
·         The US Libor-OIS (LOIS) spread is 24.4 bps, compared to 22.9 bps the prior day and 12.0 bps at the end of 2010.  Euribor-OIS is 65.1 bps, up from 64.1 bps the prior day, and 40.6 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, unchanged from 8 bps the prior day, and well off from a recent high of 33 bps on August 2nd.
·         The U.S. dollar is stronger against the euro, pound, and yen.  The dollar trades at US$74.513, compared to US$74.117 the prior day, and below its US$74.531 50-day, US$74.588 100-day, and US$76.343 200-day moving averages.  The euro trades at US$1.4282, compared to US$1.4369 Wednesday and US$1.4441 the prior day.  The euro trades below its US$1.4321 50-day and US$1.4365 100-day moving averages.  In Japan, the dollar trades at ¥77.03, compared to ¥76.66 Wednesday and ¥76.74 the prior day.  The yen trades better than its 50-day moving average ¥78.349.
·         U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.192% and 2.197%, respectively, compared to 0.200% and 2.223% Wednesday.  The yield curve narrowed to +2.005%, from +2.023% the prior day.  In the past year, the 2- and 10-year spread has varied from a low of +1.872% on August 19, 2011, and a high of +2.910% on February 4, 2011.
·         Commodities prices are generally lower, with lower petroleum, lower precious metals, but higher aluminum and copper, and lower agriculture prices.
U.S. news and economic reporting.  Today’s reporting begins at 8:00 with the September RBC consumer outlook index, followed at 8:30 by 2Q2011 nonfarm productivity and unit labor costs, and the latest week’s initial jobless claims. At 9:45, the last week’s Bloomberg consumer comfort report is released, followed at 10:00 by July construction spending, and August ISM manufacturing. Initial and continuing claims were 409K and 3735K, respectively, compared to survey 410K and 3681K, respectively. Non-farm productivity fell -0.7%. Unit labor costs rose +3.3%.
Overseas news: In August, China’s purchasing managers index (PMI) rose to 50.9 from 50.7 in July, but missed expectations of 51.0.  In August, the aggregate Eurozone PMI fell to 49.0 from 50.4 in July, while the individual PMIs in Germany, France, and Italy all fell more than expected.  An IMF draft report indicated Eurozone banks could face a €200 billion hit to capital from marking sovereign debt holdings to market values.  Today, Spain auctioned €3.6 billion in 5-year debt under depressed demand compared to recent auctions.  Today, Brazil cut interest rates by 50 basis points, surprising markets. 
Company news/research:
·         BK – Chairman and CEO Bob Kelley resigns over internal differences with Board, President Gerald Hassell named Chairman and CEO.
·         GS – cut to hold at ISI Group
·         BCS – upgraded to outperform at UBS
 
2Q2011 Earnings.  The second quarter’s earnings results exceeded revenue and earnings expectations.  Of the 470 S&P500 companies that reported earnings to date, 76% (356 out of 470) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +5.0% (versus a historical average of +2%).  EPS is up +16.5% 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 12.2x estimated 2011 earnings ($99.94) and 10.9x estimated 2012 earnings ($112.31), compared to 12.1x and 10.8x 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 +5.6%, and +4.7%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.9% and +32.5%, respectively. 
Large-cap banks trade at a median 1.17x tangible book value, and 10.2x and 8.6x 2011 and 2012 consensus earnings, respectively, compared to 1.16x tangible book value and 10.0x/8.5x 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 +37.5% and +65.2%, respectively.
Options.  Options markets are neutral to bearish.  Composite options markets are neutral, equity options markets are neutral to bearish, and index options markets are neutral to bearish.  The composite put/call ratio closed at 1.22, above its 5- and 10-period moving averages of 1.15 and 1.19, respectively.  The index put/call ratio closed at 1.64, above the 5- and 10-period moving averages of 1.58 and 1.58, respectively.  The equity put/call ratio closed the day at 0.66, below its 5- and 10-period moving averages of 0.68 and 0.75, respectively.
Wednesday’s equity markets. On the heaviest volume of the week, equity markets finished higher after both negative and positive reversals.  The NYSE, SPX, DJI, and Nasdaq all finished the last day of August higher, up +0.86%, +0.49%, +0.46%, and +0.13%, respectively.  The move in the DJI helped the index erase a loss for 2011.  The last eight day gain caps the best SPX rally since 2009.  Wednesday’s markets were indicated higher after Germany’s cabinet ratified expanded measures to help combat the euro-area debt crisis.  Markets opened higher and continued higher, pausing only to absorb the Chicago Purchasing Manager’s report, which fell to 56.5, but exceeded expectations.  A reading of 50 is the dividing line between expansion and contraction.  The post-open economic reports were upbeat, as US manufacturing new orders expanded in July, due to new orders for automobiles and airplanes.  After reaching a mid-morning intraday high, markets began to sell off after Nouriel Roubini opined that the US was headed for recession and that the Federal Reserve no longer had the ability to provide emergency support to the economy.  Probably more important, the Justice Department sued AT&T to stop its merger with T-Mobile. After a brief after noon rally, markets trended lower, with all the major indexes turning negative just after 3:00.  The last 45 minutes of August saw a robust bounce that reversed equities back to a positive close.  Despite the afternoon’s negative sentiment, the VIX finished the day at 31.62, off -3.86%.
Trading desks said buyers outweighed sellers in the morning.  Larger accounts were selling into the strength during the morning session. The afternoon session saw the buyers step to the sidelines after a very tough month, and the sellers continued to lighten positions.  Positively, most of the selling pressure was long sellers with short sellers mostly absent from the broader market.  The AAII Bullish sentiment reading was 38.62, slightly higher than the previous weeks reading of 36.44.  The Investment Company Institute (NYSEARCA:ICI) reported outflows for domestic equity mutual funds, reversing last week’s positive inflows.  The Bloomberg NYSE new net highs were +31 versus the previous reading of +29. The relative strength indicator rose to 51.39 from the previous day’s reading of 49.59, and is in the neutral range.
Market segments were mixed. Financials, utilities, and oil and gas were the leaders, while basic materials, technology, and telecommunications were the laggards.
Financials were again the leader, outperforming the broader indexes.  The XLF, BKX, and KRX were all higher, finishing up +1.29%, +1.22%, and +0.81%, respectively. Among broader financials, which have been under pressure for the past few months, ETFC (+7.38%), CBG (+3.48%), and WFC (+2.76%) were the leaders. The BKX finished the day with 21 names higher and 3 lower. The leaders beyond WFC were BBT, CMA, and FNFG which finished at least +1.99% higher. The laggards were NTRS, NYB and BK, off at least -0.36%. The KRX finished the session with 38 names higher, 10 lower and 2 unchanged. HBHC, ASBC, and VLY were the leaders, while FFBC, BXS and UBSI were the laggards. The BKX and financials in general, have been under pressure since July and have led the market lower. Since mid-August, the group has stabilized and reversed course to some degree, though it is still substantially lower than early July. Investors seemed to be taking into account the discounts to intrinsic value available in this unloved sector. 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 -31.06% below its April 2010 high and -51.61% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume rose +24.4% to 1.265 billion shares, from 1.017 billion shares Tuesday, 1.08x the 1.174 billion share 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +901 (compared to +762 the prior day), or 1.84:1.  Up volume led down volume by 2.58:1.
SPX. On higher volume, the SPX rose +5.97 points, or +0.49%, to end at 1218.89.  Volume rose +21.14% to 961.60 million shares, up from 793.78 million shares Tuesday and above the 902.10 million share 50-day moving average.  For the 13th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1256.19 vs. 1283.90 respectively)The SPX closed above its 200-week moving average (1150.76).
The SPX gapped higher at the open to the 1220 level and rallied on low volume through 10:15 to the intra-day high of 1230.71.  The index found resistance there and momentum reversed.  Through 12:00, the index retraced gains back to 1220.  A second rally at noon lifted the index back to the 1226 level at 1:00.  Momentum again turned negative, and through 3:15, the index declined steadily.  At 2:55, the index crossed into negative territory, prompting a small rally to the 1218 level at 3:05.  The rally was quickly sold, and the index again returned to negative territory by 3:15 and set the intra-day low of 1209.35 at 3:18.  A closing bell rally, perhaps fueled by month-end “window dressing” lifted the index back into positive territory and to the 1222 level by 3:50.  A quick 5-point sell off at the close to 1215 was met with equally quick buying, and the index closed at 1218.89, above its April 2010 high.     
Technical indicators are neutral to negative.  Markets, in correction since July 27th, resumed an uptrend with August 23rd’s gains in higher volume and set second consecutive recent high yesterday.  The SPX closed below 1300 for the 24th straight session but above 1200 for the 3rd straight session.  The index closed above its April 2010 highs for the first time in 20 sessions.  The 50-day moving average has been below the 100-day moving average since July 11thThe SPX closed (by +3.91%) above its 20-day moving average (1173.04) for the third straight session.  The index closed (by -2.97%) below its 50-day moving average for the 26th straight session.  The index closed (by -5.38%) below its 100-day moving average (1288.26) for the 25th straight session.  The SPX closed -5.06% below its 200-day moving average, closing below that average for the 21st straight session.  The 200-day moving average rose.  The directional momentum indicator is negative for the 25th straight session but has narrowed considerably, and the trend is very strong but declining rapidly.  Relative strength rose to 52.38 from 51.34, a neutral range.  Next resistance is at 1229.95; next support is at 1208.59.
BKX.  On higher volume, the KBW bank index rose +0.48 points, or +1.22%, to end at 39.95, its 21st close below the prior 52-week low of 42.70 from August 25, 2010 and its 18th straight sub-40 close.  Volume rose +17.04% to 110.33 million shares, up from 94.26 million shares Tuesday and above the 106.33 million share 50-day average.  The BKX closed -7.05% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -31.06% and -28.19% below its April 23, 2010, and February 14, 2011 respective closes.
Financials were the market’s best performing segment, and large-cap banks outperformed regional banks. Unlike the broader market, the BKX never traded negative on the day.  The index gapped higher at the open to the 39.80 level, and through 10:15, climbed to the intra-day high of 40.29, up +2.07% intra-day.  Through 11:30, the index declined to its opening 39.80 level before momentum reversed and a rally began.  Through 1:00, the BKX rallied back to its intra-day high water mark, but could not break above 40.30.  Momentum turned negative with the broader market, and through 3:18, the index declined to the intra-day low of 39.52, still marginally positive on the day.  A closing bell rally lifted the index up +0.60 points in 30 minutes to the 40.12 level.  The index dropped nearly -1.0% in 5 minutes to the 39.80 level at 3:58, but buyers again stepped in to recover most of the move lower.  The index closed just shy of the 40.0 level and in the middle of the day’s range.   
Technical indicators are negativeBank stocks significantly underperformed the broader market during the May-June correction and the late July-mid August sovereign debt sell-off.  Recent gains on higher volume, and bank outperformance, returned markets to an uptrend on August 23rd.  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 (43.54) crossed below the 100- and 200-day moving averages (46.54 and 49.20, respectively) on April 25th and June 16th.  The 20-day closed (by –5.25 points) below the 50-day for the 119th straight day, and the gap expanded.  The 50-day moving average closed (by -5.66 points) below the 200-day moving average for the 56th straight session, and the gap expanded.  The 100-day moving average closed (by –2.66 points) below the 200-day moving average for the 34th straight session, and the gap expanded.  The index closed above the 20-day moving average for the 3rd straight session.  The index closed below its 50-, 100-, and 200-day moving average for the 38th, 99th, and 64th consecutive sessions, respectively.  The index closed below 50.00 for the 64th straight session and below 40.00 for the 18th straight session.  The directional movement indicator is negative for the 27th straight session but has narrowed, and the trend is very strong but declining rapidly.  Relative strength rose to 49.16 from 47.39, a neutral range.  Next resistance is 40.32; next support at 39.55.
Stocks: ETFC, CBG, WFC, BBT, CMA, FNFG, NTRS, NYCB, BK, HBHC, ASB, VLY, FFBC, BXS, UBSI, GS, BCS