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Gary Townsend
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Gary Townsend - Since 2007, a founding partner, CEO and Portfolio Manager of Hill-Townsend Capital LLC, a long/short equity financial sector fund based in Chevy Chase, Maryland. Mr. Townsend has 30 years banking, regulatory, and investment experience. He started his business career in 1978, as... More
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  • U.S. Equity Futures Little Changed Ahead of Today's FOMC Report, Asia Mixed, Europe Lower 0 comments
    Sep 21, 2011 9:04 AM | about stocks: BBT, HBAN, WFC, FNFG, BAC, C, PNFP, HCBK, FRC, GNW, LM, ETFC, WBS, TCB, PACW, V, DFS, HCP
    This morning.  U.S. equity markets are in a confirmed uptrend.  Overall trading patterns suggest an improving equity outlook as indexes are testing resistance at their 50-day moving averages. However, 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.  Asian markets closed mixed, with better results in Japan and Shanghai. Hong Kong markets closed lower. Eurozone equities are lower, awaiting clarification as to the Greek refunding and this afternoon’s FOMC report. The U.S. dollar is mixed.  Commodities markets are also mixed.  U.S. Treasury prices are mixed.  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 +0.19 points, September SPX equity futures are at 1194.90, down -1.29 points.  The SPX opens at 1202.09, -11.9% below its recent April 29 multi-year closing high, +1.21% above its 20-day and -1.74% below its 50-day moving averages.  The SPX is -4.42% below its 1257.64 year-end close.  Next resistance is at 1214.56; next support is at 1195.46.
    Tuesday.  U.S. equities spent most of the day higher, but found resistance at their respective 50-day moving averages. The SPX traded to a mid-morning intraday high of 1220.39, its best level in September (the 50-day moving average is 1223.40 and trending lower). Markets traded sideways through mid-afternoon. In the final hour, a report that Eurozone officials would meet again today on the Greek refunding spurred markets to sell off, and they ended mixed. At the close, the major indexes closed mixed. The DJI gained +0.07%, while the Nasdaq, NYSE composite, and SPX lost -0.86%, -0.24%, and -0.17%, respectively. Segments were mixed. Leaders were utilities, health care, and telecommunications, with gains of at least +0.50%. Laggards were oil and gas, industrials, and basic materials, with losses of at least -0.56%. Volatility rose +0.40% as the VIX ended at 32.86, up from 32.73 the prior day.
    Higher volume accompanied yesterday’s index losses, and Nasdaq losses were sufficient to qualify as a distribution. Since the August 23rd uptrend confirmation, distributions number 4 on the DJI, SPX, and Nasdaq, and 3 on the 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, equity markets closed higher in Japan and mixed in China. Volume increased. Commentary cited Chinese July leading and coincident indexes, which improved slightly compared to June and signaled continuing economic expansion.
    In Japan, the Nikkei closed at 8,741.16, up +0.23%, on a +2.88% in volume. The NKY closed -0.28% below its 20-day, and below its 50-, 100-, and 200-day moving averages.  Most market segments closed higher. Leaders were health care, industrials, and financials, which closed up at least +0.46%. Utilities, consumer goods, and telecommunications were the laggards. 
    In China, the Hang Seng and Shanghai composite closed at 18,824.17 and 2,512.96, respectively, down -1.00% and up +2.66%.  In Hong Kong, volume rose +3.89%.  The HS I gapped lower, but rallied back to breakeven at mid-day. Weak European equity markets spurred selling through most of the afternoon, with the HSI finally finding support at the 18700 level. In the final hour, the HSI rebounded into the close.  Market segments were mixed, with consumer goods, basic materials, and industrials leading with gains of at least +0.50%. Financials lost -1.31%. Oil and gas, technology, and consumer services lagged with losses of at least -1.50%. The HSI is off -18.3% in 2011. In Shanghai, volume rose +81.3%.  The SHCOMP traded sideways through the first hour, then began a rally that continued through the close. All market segment closed at least +1.93% higher. Leaders were basic materials, industrials, and health care. Utilities, oil and gas, and financials were the segment leaders.  Utilities, oil and gas, and financials lagged, but still posted strong gains.  The SHCOMP closed -10.5% below its 2010 close and -3.81% below its 50-day moving average.
    In Europe, equities markets opened lower, and a couple of rally attempts have failed. The Euro Stoxx 50, FTSE, and DAX are down -1.16%, -0.77%, and -1.36%, respectively, but are trading off the day’s lows. Commentary suggest that markets are waiting on further clarification of Greek refunding and this afternoon’s FOMC report. On the EuroStoxx50, only technology is higher, up +0.32%. Other segment leaders are oil and gas and consumer services. Telecommunications, basic materials, and financials are laggards.  Financials are down -1.92%. 
    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 fell to 0.14611% from 0.14667% Tuesday, but down from 0.25188% at year-end.  USD 3-month LIBOR rose to 0.35556%, from 0.35500% the prior day, the highest level of the year.
    ·         The US Libor-OIS (LOIS) spread fell to 28.6 bps, from 29.0 bps the prior day and 12.0 bps at the end of 2010.  Euribor-OIS rose to 83.0 bps from 79.5 bps Tuesday, 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 10 bps, unchanged from the prior day, and down from 16 bps last Thursday and well off from a recent high of 33 bps on August 2nd.
    ·         The U.S. dollar is slightly stronger against the euro and pound, but weaker against the yen.  The dollar trades at US$77.202, compared to US$77.030 the prior day, and above its US$74.921 50-day, US$74.946 100-day, and US$76.088 200-day averages.  The euro trades at US$1.3652, compared to US$1.3702 Monday and US$1.3686 the prior day.  The euro trades below its US$1.4187 50-day and US$1.4255 100-day averages.  In Japan, the dollar trades at ¥76.80, compared to ¥76.93 Tuesday and ¥76.66 the prior day.  The yen trades better than its 50-day moving average ¥78.274.
    ·         U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.157% and 1.944%, respectively, compared to 0.161% and 1.938% Tuesday.  The yield curve widened to +1.787% from +1.777% 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 mixed, with mixed petroleum, higher precious metals, lower aluminum and copper, and higher agricultural prices.
    U.S. news and economic reporting.   Today’s economic reporting is focused on August existing home sales. The FOMC concludes its two-day meeting today with its statement at 2:15.  The World Bank/IMF annual meeting begins Friday.
    Overseas news: Today, Lloyds of London announced it pulled deposits from some major European banks, citing worries over governments’ ability to rescue troubled institutions.  Today, the Bank of England released its September 8th meeting minutes, which signal an increased chance of further easing in the near future.   Today, the head of German Chancellor Merkel’s main political coalition partner said the parliament will ratify changes to the European bailout fund when the September 29th vote is held.  For August, China’s Leading Economic Indicators index rose +0.6%, boosting confidence in the economy’s further expansion. 
    Company news/ratings changes:
    ·         NLY – announced a 3rd quarter dividend of $0.60 per share, compared to $0.65 prior. 
     
    2Q2011 Earnings.  The second quarter’s earnings results exceeded revenue and earnings expectations.  Of the 481 S&P500 companies that reported earnings to date, 75% (362 out of 481) 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 +16.3% 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 12.1x estimated 2011 earnings ($99.37) and 10.8x estimated 2012 earnings ($111.34), compared to 12.1x and 10.8 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 +5.0%, and +3.8%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.2% and +31.3%, respectively. 
    Large-cap banks trade at a median 1.16x tangible book value, and 10.4x and 8.4x 2011 and 2012 consensus earnings, respectively, compared to 1.15x tangible book value and 10.4x/8.4x 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 +35.8% and +65.2%, respectively.
    Options.  Options markets are bearish.  Composite options markets are neutral to bearish, equity options markets are bearish, and index options markets are bearish.  The composite put/call ratio closed at 1.11, compared to 0.99 Monday and above its 5- and 10-period moving averages of 1.03 and 1.10, respectively.  The index put/call ratio closed at 1.63, compared to 1.35 Monday and below the 5- and 10-period moving averages of 1.36 and 1.41, respectively.  The equity put/call ratio closed the day at 0.63, compared to 0.62 Monday and below its 5- and 10-period moving averages of 0.65 and 0.69, respectively.
    Tuesday’s equity markets. On mixed volume, the equity markets closed mixed.  The DJI finished higher, up +0.07%, while the Nasdaq, NYSE, and SPX were all lower, off -0.86%, -0.24%, and -0.17%, respectively.  Futures indicated a higher open, anticipating some clarity on refunding Greece.  At the open, markets gained, but quickly sold off in the first half hour.  Over the balance of the morning, the market gained significantly, touching 1220 on the SPX, but finding resistance there, just short of the 1223.40 50-day moving average. Markets traded in a sideways pattern through the early afternoon.  Mid-afternoon news reports failed to provide clarity as to whether and when approval for Greece would be finally given. Markets sold off in  the last hour, eliminating most gains.  The VIX ended the day at 32.86, up +0.40%.
    Trading desks reported light volumes with most investors watching the outcome from Greece and the beginning of the two-day meeting of Federal Open Market Committee. Traders reported that some quicker hedge funds had positioned themselves early in the session for positive progress from Greece, but that when that did not occur, quickly exited positions.  Investors have a busy week of news, both domestic and international, and markets will likely be headline driven. The Bloomberg NYSE new net highs were -26 versus the previous day’s reading of -53.  The relative strength indicator fell to 46.16 from the previous reading of 46.69, in the lower end of a neutral range.
    Market segments were mixed. Utilities, health care and telecommunications were the leaders, while oil and gas, industrials, and basic materials were the laggards.
    Financials underperformed the broader indices.  The KRX, BKX, and XLF were all lower, off -1.28%, -0.35%, -0.32%, respectively. The BKX had been tracking the broader averages during the day, with banks outperforming, but after the news from Greece of a continuation of meetings for October, the financials sold off and finished with a loss. The BKX finished the day with 7 names higher and 17 lower. Leaders included BBT, HBAN, and WFC, while the laggards were FNFG, BAC, and C. The KRX finished with 3 names higher, 46 lower and 1 unchanged. The 3 names higher were PNFP, HCBK, and FRC. The laggards in the KRX were WBS, TCB, and PACW. Among the broader financials, V, DFS, and HCP outperformed each up at least +1.68%. The laggards among the broader names were GNW, LM and ETFC, off at least -2.64%. Financials have been acutely sensitive to developments in Europe during the debt crisis as European banks have significant exposure to some of the primary countries involved. Investors have been accumulating small pieces of the higher quality names in the group, as valuations remain at depressed levels. 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 -35.36% below its April 2010 high and -54.62% below its best level of 82.55 in September 2008.
    NYSE Indicators.  Volume rose +1.96% to 926.25 million shares, from 908.4 million shares Monday, 0.77x the 1.210 billion share 50-day moving average.  Market breadth was negative, and up volume lagged down volume.  Advancing stocks lagged decliners by -814, (compared to -1,647 the prior day), or 0.57:1.  Up volume lagged down volume by 0.58:1.
    SPX. On lower volume, the SPX fell -2.00 points, or -0.17%, to end at 1202.09.  Volume fell -2.24% to 722.14 million shares, down from 738.70 million shares Monday and below the 952.58 million share 50-day moving average.  For the 26th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1223.40 vs. 1283.38 respectively).  The SPX closed above its 200-week moving average (1146.63).
    The SPX opened modestly higher to the 1206 level and rose to 1210 by 9:35.  Momentum quickly reversed, and the index declined through 9:50, turning negative at 9:45 and setting the intra-day low of 1201.29 at 9:50.  Through 11:15, the index rallied almost 20 points straight up, and set the intra-day high of 1220.39 at 11:15.  Through 2:30, the SPX traded sideways between 1215 and 1220, awaiting the result of Greece’s conference call with European monetary and governmental authorities over its bailout package and austerity measures.  The announcement signaled nothing definitive, disappointing markets.  Through the close, the index fell in a mirror image of the morning’s rally, dropping -16 points in 75 minutes.  After maintaining healthy gains for almost the entire trading session, the SPX turned negative at 3:45 and closed just above its intra-day low from the morning. 
    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 37h straight session but above 1200 for the fourth straight session.  The index closed below its April 2010 highs for the 32nd time in the last 33 sessions.  The 50-day moving average has been below the 100-day moving average since July 11th.  The 100-day moving average cross the 200-day average to the downside on September 7th.  The SPX closed (by +1.21%) above its 20-day moving average (1187.77) for the fifth straight session.  The index closed (by -1.74%) below its 50-day moving average for the 39th straight session.  The index closed (by -5.34%) below its 100-day moving average (1269.92) for the 38th straight session.  The SPX closed -6.33% below its 200-day moving average, closing below that average for the 34th straight session.  The 20-day moving average rose.  The directional momentum indicator is negative for the 37th straight session but has narrowed considerably, and the trend is moderate and declining.  Relative strength fell to 51.33 from 51.78, a neutral range.  Next resistance is at 1214.56; next support is at 1195.46.
    BKX.  On lower volume, the KBW bank index fell -0.13 points, or -0.35%, to end at 37.46, its 34th close below the prior 52-week low of 42.70 from August 25, 2010 and its 31st straight sub-40 close.  Volume fell -9.14% to 70.38 million shares, down from 77.46 million shares Monday and below the 112.65 million share 50-day average.  The BKX closed -12.84% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -35.36% and -32.66% below its April 23, 2010, and February 14, 2011 respective closes.
    Financials outperformed the market, and large-cap banks outperformed regional banks.  The BKX opened higher to 37.85 and climbed to 37.92 by 9:35.  Momentum reversed with the broader market, and the index retraced its gains to the 37.65 level by 9:50, though still in positive territory unlike the SPX.  The BKX rallied through 10:05 with the broader market, but a financials-focused sell-off hit at 10:05 and sent the index from 37.75 to 37.50 in 10 minutes, crossing into negative territory.  The index quickly reversed its loss, crossed back into positive territory at 9:30, and rallied to the intra-day high of 38.15 by 11:15, up +1.5% intra-day.  Financials lost support, and though the index traded relatively sideways through 3:00, the range was wider than the broader market.  The 3:00 sell-off dropped the BKX from 38.00 at 3:00 into negative territory by 3:45, and further to the intra-day low of 37.46 at the close. 
    Technical indicators are negative.  Bank 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 (40.90) crossed below the 100- and 200-day moving averages (44.80 and 48.65, respectively) on April 25th and June 16th.  The 20-day closed (by -2.97 points) below the 50-day for the 132nd straight day, but the gap narrowed.  The 50-day moving average closed (by -7.76 points) below the 200-day moving average for the 69th straight session, and the gap expanded.  The 100-day moving average closed (by -3.85 points) below the 200-day moving average for the 47th straight session, and the gap expanded.  The BKX closed below its 20-, 50-, 100-, and 200-day moving averages for the 1st, 51st, 52nd, and 77th consecutive sessions, respectively.  The index closed below 50.0 for the 77th straight session and below 40.00 for the 31st straight session.  The directional movement indicator is negative for the 40th straight session but has narrowed considerably, and the trend is moderate and declining.  Relative strength fell to 45.01 from 45.48, a neutral range.  Next resistance is 37.92; next support at 37.23.
    Themes: financial stocks, macro-outlook, sx5e, dax, spx, dji, ccmp, nya, bkx, xlf, nky, hsi, shcomp, ftse Stocks: BBT, HBAN, WFC, FNFG, BAC, C, PNFP, HCBK, FRC, GNW, LM, ETFC, WBS, TCB, PACW, V, DFS, HCP
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