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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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  • Eurozone Finance Ministers' Inaction Pushes U.S. Equity Futures Lower 0 comments
    Sep 19, 2011 8:58 AM | about stocks: UBS, CFR, CBSH, FNFG, SIVB, PACW, CHCO, CATY, TCB, BRKS, RF, C, BBT
    This morning.  U.S. equity markets are in a confirmed uptrend.  After five consecutive days’ advance, the Nasdaq is up +1.66% in September, though other major indexes are lower for the month, and all remain lower in 2010.  Overall trading patterns suggest an improving equity outlook, but the strength and durability of the current uptrend, which was confirmed on August 22nd, has been in doubt since August 23rd, when a distribution day immediately followed the confirmation.  Equity options markets suggest a neutral to bearish short-term outlook.  Japanese markets were closed for holiday.  On heightened Eurozone sovereign debt and bank solvency concerns, Chinese markets sold off on mixed volume and closed at fresh 2011 lows. Over the weekend, Eurozone finance ministers offered no new funds to private banks and delayed consideration of Greece’s next support tranche to mid-October. Eurozone equities are lower, losing all the prior two days’ gains. The U.S. dollar is stronger.  Commodities markets are lower.  U.S. Treasury prices are higher.  LIBOR markets suggest continued interbank lending credit concerns, though the coordinated central bank lending facility seems to have taken the edge off these concerns.  Euribor-OIS spreads are higher.  After a fair value adjustment of -1.74 points, September SPX equity futures are at 1192.00, down -18.00 points, but off the morning’s worst levels.  The SPX opens at 1216.01, -10.8% below its recent April 29 multi-year closing high, +3.07% above its 20-day and -1.02% below its 50-day moving averages.  The SPX is -3.31% below its 1257.64 year-end close.  Next resistance is at 1222.56; next support is at 1206.96.
    Friday.  On quadruple options expiration, U.S. equities rose for a 5th consecutive day, on options expiration enhanced volume. The DJI, Nasdaq, SPX, and NYSE composite rose +0.66%, +0.58%, +0.57%, and +0.26%, respectively.  Most segments closed higher, led by telecommunications, consumer services, and utilities,. Basic materials, financials, and oil and gas were the laggards. Financials gained +0.20%. Volatility fell, with the VIX down -3.10% to end at 30.98, down from 31.97 at the prior close. The VIX closed at its lowest level since August 3rd.
    Since the August 23rd uptrend confirmation, distributions number 4 on the DJI and SPX, and 3 on the Nasdaq, NYSE composite, and BKX.  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 markets were closed for holiday. On European sovereign debt and bank solvency concerns, Chinese equity markets sold off sharply, with both the Hang Seng and Shanghai composite closing at new 2011 lows. Sentiment turned negative after Eurozone finance ministers postponed approval of the next tranche of Greek debt funding.
    In Japan, the Nikkei is at 8,864.16, down -13.35 in 2010. The NKY closed above its 20-day moving average, but below its 50-, 100-, and 200-day moving averages.
    In China, the Hang Seng closed at 18,917.95, down -2.76%.  Volume fell -36.6%.  All market segments were lower.  The HSI is off -17.9% in 2011. Telecommunications, utilities, and technology were the leaders. Financials dropped -3.02%. Consumer goods, basic materials, and consumer services were the worst segments, off at least -4.69%. gas, and technology led with gains of at least +2.12%.  Financials rose +1.96%.  Telecommunications, utilities, and consumer services closed at least -1.08% lower.  From the 19,247.60 Friday close, the HSI gapped lower and fell to 19,000 by mid-morning, where it found support until a late day sell-off to the 18,876.10 intraday low minutes before the close. The SHCOMP fell -1.79%, with a +1.25% increase in  volume.  The index also gapped lower and trended lower through the day to end just a fraction better than its 2437.17 intraday low. Except for telecommunications (+1.30%), all other market segments ended at least -1.20% lower. Consumer goods and oil and gas were the other leaders. Financials shed -1.75%. Technology, industrials, and basic materials were the laggards and off at least -1.97%. The SHCOMP closed at 2437.80, -13.2% below its 2010 close and -7.20% below its 50-day moving average.
    In Europe, equities markets gapped about lower, giving back all the prior two days’ substantial gains, but are presently trading above their intraday lows. The Euro Stoxx 50, FTSE, and DAX are off -2.31%, -1.62%, and -2.40%, respectively. On the Euro Stoxx, all market segments are at least -1.75% lower. The best segments are industrials, health care, and consumer goods, off at least -1.71%. Financials are -2.26% lower. Consumer services, utilities, and oil and gas are the worst performers, down at least -2.51%. 
    Libor, LOIS, Currencies, Treasuries, Commodities:
    ·         Interbank lending rates continue to reflect increased stress, as concerns heighten regarding the health of Eurozone banks in a stressed economic environment. Overnight USD LIBOR rose to 0.14833%, compared to 0.14677% Friday, but down from 0.25188% at year-end.  USD 3-month LIBOR rose to 0.35250%, from 0.35133% the prior day, the highest level of the year.
    ·         The US Libor-OIS (LOIS) spread fell to 28.3 bps, from 28.4 bps the prior day and 12.0 bps at the end of 2010.  Euribor-OIS rose to 78.5 bps, from 75.3 bps Friday, and compares to 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 13 bps, down from 16 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, yen, and pound.  The dollar trades at US$77.076, compared to US$76.599 the prior day, and above its US$74.856 50-day, US$74.864 100-day, and US$76.114 200-day averages. The euro trades at US$1.3664, compared to US$1.3796 Friday and US$1.3877 the prior day.  The euro trades below its US$1.4203 50-day and US$1.4278 100-day averages.  In Japan, the dollar trades at ¥76.69, compared to ¥76.79 Friday and ¥76.70 the prior day.  The yen trades better than its 50-day moving average ¥77.450.
    ·         U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.169% and 2.006%, respectively, compared to 0.165% and 2.048% Friday.  The yield curve narrowed to +1.837% from +1.883% the prior day.  In the past year, the 2- and 10-year spread has varied from a low of +1.742% on September 12, 2011 to a high of +2.910% on February 4, 2011.
    ·         Commodities prices are mostly lower, lower petroleum, lower precious metals, higher aluminum, but lower copper, and lower agricultural prices.
    U.S. news and economic reporting.   Today’s economic reporting is limited to the NAHB Housing Market Index for September, but it is a busy week that includes a 2-day FOMC meeting, and the World Bank/IMF annual meeting begins Friday.
    Overseas news: Today, senior officials from the European Central Bank, the IMF, and the European Union hold a conference call with Greek finance officials to discuss the country’s progress towards meeting its austerity targets.  Sunday, the Greek government held an emergency cabinet meeting to discuss further austerity measures amid growing signs the country’s next tranche of bailout funds may be withheld.  This weekend, German Chancellor Merkel’s political coalition suffered its sixth straight regional election defeat.  Spain’s bank rescue fund is expected to nationalize three more groups of savings banks by month’s end at a cost of €5 billion.  
    Company news/ratings changes:
    ·         UBS – cut to hold at Collins Stewart
     
    2Q2011 Earnings.  The second quarter’s earnings results exceeded revenue and earnings expectations.  Of the 476 S&P500 companies that reported earnings to date, 75% (358 out of 476) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +4.9% (versus a historical average of +2%).  EPS is up +16.4% 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 third quarter of 2011, analysts estimate the SPX will earn $24.98 per share, compared to $24.84 and $21.49 per share in 2Q11 and 3Q10, a +0.6% and +16.2% 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 ($99.57) and 10.9x estimated 2012 earnings ($111.79), compared to 12.1x and 10.8x 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 +5.2%, and +4.2%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.4% and +31.9%, respectively. 
    Large-cap banks trade at a median 1.18x tangible book value, and 10.6x and 8.6x 2011 and 2012 consensus earnings, respectively, compared to 1.18x tangible book value and 10.7x/8.6x 2011/2012 earnings Friday.  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 +35.8% and +65.2%, respectively.
    Options.  Options markets are neutral to bearish.  Composite options markets are bearish, equity options markets are neutral to bearish, and index options markets are neutral to bearish.  The composite put/call ratio closed at 1.03, compared to 1.01 Thursday and below its 5- and 10-period moving averages of 1.10 and 1.16, respectively.  The index put/call ratio closed at 1.29, compared to 1.23 Thursday and below the 5- and 10-period moving averages of 1.39 and 1.46, respectively.  The equity put/call ratio closed the day at 0.67, compared to 0.68 Thursday and below its 5- and 10-period moving averages of 0.69 and 0.72, respectively.
    Friday’s equity markets. On quadruple options expiration, volume rose to 1.5x the 50-day moving average. Markets rose early, tested resistance unsuccessfully, fell back, and rallied into the close, largely for technical reasons.  The DJI, Nasdaq, SPX and NYSE were all higher, up +0.66%, +0.58%, +0.57%, and +0.26%, respectively.  Markets advanced for a fifth day amid unfounded optimism that weekend meetings of the Eurozone leaders would produce further progress on controlling the region’s debt crisis.  In the first hour, markets gained ground to their highs for the day, with the SPX briefly touching 1220. After release of a better than expected consumer confidence report, markets sold off to levels below the open to intraday lows just before noon. In afternoon, indexes rebounded to more modest gains. For technical options-driven reasons in the last hour, indexes rose but not to early morning levels.  The VIX closed at 30.98, off -3.10%, its lowest point since August 3rd.
    Trading desks reported very heavy volume Friday, mostly due to the quarterly options expiration. Traders reported larger accounts as better buyers this week. More than one desk commented that accounts are ignoring the exterior (Greece, Europe debt crisis) and have focused on the historic low valuations in multiple sectors.  The past few days have seen better buyers in what some traders call an absence of sellers and short sellers.  Markets have seemed fatigued at times, suggesting that buyers are not aggressively pursuing names.  The Bloomberg NYSE new net highs were +15.00 versus the previous day’s reading of +10.00. The relative strength indicator rose to 50.27 from Thursday’s 49.27, and is in low end of a neutral range.
    Market segments were mixed.  Telecommunications, consumer services, and utilities were the leaders, while basic materials, financials, and oil and gas were the laggards.
    Financials gave up their recent market leadership and underperformed the broader markets.  The XLF finished positively, up +0.27%, while the KRX and BKX were lower, off -0.57% and -0.41%, respectively.  The BKX followed the broader markets higher early in the day, but then sold off in the late morning and remained in the cellar for the balance of the day. The BKX finished the day with 5 names higher and 19 lower. Leaders in the average included RF, C, and BBT, while CFR, CBSH, and FNFG were the laggards. The KRX finished the day 14 names higher, 35 lower and 1 unchanged. The leaders were CATY, TCB, and BRKL, while SIVB, PACW, and CHCO were the laggards. Investors continue to digest information provided earlier in the week at an industry conference. The group is also keenly focused on events in Europe, as a number of various European financial entities have significant exposure to countries affected by the debt crisis. The valuations for the group remain attractive and investors have definitely been better buyers of the group this past week. 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 -33.24% below its April 2010 high and -53.13% below its best level of 82.55 in September 2008.
    NYSE Indicators.  Volume rose +88.1% on quadruple options expiration, compared to 964.0 million shares Thursday, 1.50x the 1.205 billion share 50-day moving average.  By slight margins, market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +53 (compared to 1,586 the prior day), or 1.04:1.  Up volume led down volume by 1.30:1.
    SPX. On higher, options expiration-inspired volume, the SPX rose +6.90 points, or +0.57%, to 1216.01.  Volume rose +95.42% to 1,568 million shares, up from 802.48 million shares Thursday and above the 948.14 million share 50-day moving average.  For the 24th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1228.54 vs. 1283.58 respectively)The SPX closed above its 200-week moving average (1147.82).
    The SPX gapped higher at the open to the 1213 level and continued rising to 1220.06 at 9:55, setting the intra-day high.  That level proved strong resistance, and the market retraced back to 1214 by 10:05 only to retry the 1220 level at 10:15.  Again failing there, the SPX fell straight through 10:55, turning negative at 10:40 and reaching the intra-day low of 1204.46 at 10:55.  By 11:15, the index rebounded back to break-even before selling off to 1205 at 11:30.  Through 12:50, the index rallied back to positive territory and to the 1217 level.  Through the close, the index traded in a narrow range from 1209 to 1216, never turning negative.  The index closed towards the higher end of the day’s range. 
    Technical indicators are neutral to negative.  Markets, in correction since July 27th, resumed an uptrend with August 23rd’s gains in higher volume.  The SPX closed below 1300 for the 35th straight session but above 1200 for the second straight session.  The index closed below its April 2010 highs for the 30th time in the last 31 sessions.  The 50-day moving average has been below the 100-day moving average since July 11thThe SPX closed (by +3.07%) above its 20-day moving average (1179.83) for the third straight session.  The index closed (by -1.02%) below its 50-day moving average for the 37th straight session.  The index closed (by -4.48%) below its 100-day moving average (1273.02) for the 36th straight session.  The SPX closed -5.26% below its 200-day moving average, closing below that average for the 32nd straight session.  The 20- and 200-day moving averages rose.  The directional momentum indicator is negative for the 35th straight session but has narrowed considerably, and the trend is moderate and declining.  Relative strength rose to 54.38 from 53.11, the highest level since July 26th and in a neutral range.  Next resistance is at 1222.56; next support is at 1206.96.
    BKX.  On higher volume, the KBW bank index fell -0.16 points, or -0.41%, to end at 38.69, its 32nd close below the prior 52-week low of 42.70 from August 25, 2010 and its 29th straight sub-40 close.  Volume rose +91.82% to 161.03 million shares, up from 83.95 million shares Thursday and above the 112.18 million share 50-day averageThe BKX closed -9.98% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -33.24% and -30.45% below its April 23, 2010, and February 14, 2011 respective closes.
    Financials underperformed the market, and regional banks underperformed large-cap banks.  The BKX opened flat at 38.85.  The broader market rally from 9:30 through 9:50 lifted financials modestly, and the BKX rose to its intra-day high of 39.15.  Financials began their descent before the broader market and turned negative by 10:00.  The BKX continued falling through 11:00, setting the intra-day low of 37.96 then.  Through 12:50, the index rallied back to 38.60, but retraced to 38.20 by 1:35.  From 1:35 through the close, the BKX rallied more aggressively than the SPX, but still finished with a modest loss on the day.   
    Technical indicators are negativeBank stocks significantly underperformed the broader market during the May-June correction and the late July-mid August sovereign debt crisis 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 (41.30) crossed below the 100- and 200-day moving averages (45.08 and 48.76, respectively) on April 25th and June 16th.  The 20-day closed (by -3.60 points) below the 50-day for the 130th straight day, but the gap narrowed.  The 50-day moving average closed (by -7.45 points) below the 200-day moving average for the 67th straight session, and the gap expanded.  The 100-day moving average closed (by -3.68 points) below the 200-day moving average for the 45th straight session, and the gap expanded.  The index closed above its 20-day moving average for the third straight session.  The BKX closed below its 50-, 100-, and 200-day moving averages for the 49th, 50th and 75th consecutive sessions, respectively.  The index closed below 50.0 for the 75th straight session and below 40.00 for the 29th straight session.  The directional movement indicator is negative for the 38th straight session but has narrowed considerably, and the trend is moderate and declining.  Relative strength fell to 49.53 from 50.13, a neutral range.  Next resistance is 39.24; next support at 38.05.
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