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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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  • FOMC "Significant Downside" Sends Equities, Futures Lower 0 comments
    Sep 22, 2011 9:33 AM | about stocks: CIM, BAC, WFC, C, NTRS, COF, STT, CMA, HBAN, PRK, PACW, FRC, HCBK, WTFC, BPFH
    This morning.  U.S. equity markets’ confirmed uptrend is under pressure after yesterday’s stumble on increased volume.  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 short-term outlook.  Asian markets closed substantially lower on a weaker than expected Chinese PMI report. In train, Eurozone equities are moving substantially lower and the trend has worsened through the morning. The U.S. dollar rose sharply after yesterday’s FOMC report and has continued to strengthen against the euro and pound. Commodities markets are selling off. U.S. Treasury prices are higher, with the narrowest spread between 2- and 10-year Treasuries in several decades. LIBOR markets suggest continued interbank lending credit concerns.  Euribor-OIS spreads are higher.  After a fair value adjustment of +5.06 points, September SPX equity futures are at 1121.50, down -39.36 points.  The SPX opens at 1166.20, -14.4% below its recent April 29 multi-year closing high, -1.79% below its 20-day and -4.40% below its 50-day moving averages.  The SPX is -7.23% below its 1257.64 year-end close.  Next resistance is at 1193.30; next support is at 1153.21.
    Wednesday.  U.S. equities spent most of the day waiting for the FOMC statement, which was released after a technical delay at about 2:30 pm. As expected, the Fed announced an operation “twist”, designed to modestly reduce longer term interest rates, but markets focused on its statement that the downside risks to the economic outlook were “substantial”, citing strains in global financial markets. From the 1995 level on the SPX, markets sold off in the final 45 minutes to end near their intraday lows, on heavy volume. The NYSE composite shed -3.50%, followed by losses on SPX, DJI, and Nasdaq of -2.94%, -2.49%, and 2.01%, respectively. All market segments closed at least -1.13% lower. Technology, utilities, and telecommunications were the better segments, but closed at least -1.13% lower. Laggards were industrials, financials, and basic materials, which lost at least -3.90%. Volatility rose +13.6% as the VIX ended at 37.32, up from 32.86 the prior day.

    Higher volume accompanied yesterday’s index losses, and distributions were recorded across the board.  Since the August 23rd uptrend confirmation, distributions number 5 on the DJI, SPX, and Nasdaq, and 4 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 substantially lower. Volume was higher in Japan and Hong Kong, but lower in Shanghai. Commentary cited the FOMC’s statement that “there are significant downside risks to the economic outlook”; also, Chinese PMI weakened slightly in September. Trading desks also cited 3Q2011 earnings pressures and the probability that interest rates will be raised again to control inflationary pressures.
    In Japan, the Nikkei closed at 8,560.26, down -2.07% on a 8,741.16, up +0.23%, on a +16.8% increase in volume.  The NKY closed -2.35% below its 20-day, and below its 50-, 100-, and 200-day moving averages.  The index gapped lower and trended lower to an early afternoon intraday low of 8545.46. Market segments closed mixed, with utilities and consumer services higher.  Financials were middling performers, down -2.42%. Laggards were industrials, basic materials, and telecommunications.
    In China, the Hang Seng and Shanghai composite closed at 17,911.95 and 5,443.06, respectively, down -4.85% and -2.78%.  In Hong Kong, volume rose +42.8%.  The HSI gapped lower and trended lower through the day to a 17,859.30 intraday low minutes before the close. All market segments closed at least -1.50% lower.  Utilities, consumer services, and telecommunications were the segment leaders. Financials lost -5.10% on Eurozone funding concerns. Oil and gas, technology, and basic materials were the laggards with losses of at least -5.94%. The HSI is off -22.2% in 2011.  In Shanghai, volume fell -10.8%.  The SHCOMP gapped down about -1.0%, and trended gradually lower through the day to end just above the 2,442.46 intraday low. All market segments closed at least -1.67% lower.  Segment leaders were telecommunications, oil and gas, and utilities, which lost at least -1.67%. Financials dropped -2.78%. Consumer goods, industrials, and basic materials were the laggards, off at least -2.99%. The SHCOMP closed -13.0% below its 2010 close and -6.31% below its 50-day moving average.
    In Europe, equities markets gapped about -2% lower, trended lower through late morning, but have recovered mildly from the day’s worst levels. The Euro Stoxx 50, FTSE, and DAX are down -4.41%, -4.34%, and -4.17%, respectively.  Commentary cited the FOMC statement, diminished earnings prospects, eurobank solvency concerns, and unresolved sovereign funding challenges.  On the EuroStoxx50, all market segments are at least -3.56%. The better segments are health care, technology, and consumer services. Consumer goods, financials, and industrials are the laggards, off at least -4.78%. 
    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 is 0.14611%, unchanged from 0.14611%  from Wednesday, but down from 0.25188% at year-end.  USD 3-month LIBOR rose to 0.35806%, from 0.35556% the prior day, the highest level of the year.
    ·         The US Libor-OIS (LOIS) spread rose to 26.9 bps, from 26.8 bps the prior day and 12.0 bps at the end of 2010.  Euribor-OIS rose to 86.4 bps from 82.6 Wednesday, 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 8 bps, unchanged from the prior day, and down from 16 bps on September 15th and well off from a recent high of 33 bps on August 2nd.
    ·         The U.S. dollar strengthened substantially after the yesterday’s FOMC statement, and continues to strengthen this morning against the euro and pound, while weakening slightly against the yen.  The dollar trades at US$78.508, compared to US$77.342 the prior day, and above its US$74.989 50-day, US$74.990 100-day, and US$76.080 200-day averages.  The euro trades at US$1.3448, compared to US$1.3564 Tuesday and US$1.3702 the prior day.  The euro trades below its US$1.4172 50-day and US$1.4243 100-day averages.  In Japan, the dollar trades at ¥76.20, compared to ¥76.46 Tuesday and ¥76.45 the prior day.  The yen trades better than its 50-day moving average ¥77.283.
    ·         U.S. Treasury yields are lower across the yield curve, with 2- and 10-year maturities yielding 0.182% and 1.774%, respectively, compared to 0.194% and 1.858% Wednesday.  The yield curve narrowed to 1.592% from +1.664% the prior day.  In the past year, the 2- and 10-year spread has varied from a low of +1.592% on September 22, 2011 to a high of +2.910% on February 4, 2011.
    ·         Commodities prices are substantially lower, with lower petroleum, precious metals, aluminum and copper, and agricultural prices.
    U.S. news and economic reporting.   Today’s economic reporting focuses on the latest week’s initial and continuing jobless report, at 8:30. Initial claims were 423K and continuing claims were 3727K. Survey was 420K and 3722K, respectively, compared to prior 428K and 3726K.   At 10:00, August leader indicators (survey +0.1%, down from +0.5% prior) will likely move markets.
    Overseas news: In September, China’s purchaser managers index (PMI) fell to 49.4 from 49.9, below the 50.0 expansionary threshold.  In September, Europe’s initial manufacturing and services PMIs missed expectations and came in below the 50.0 expansionary threshold.  Today, Italy cut its 2012 growth forecast in half, to +0.6% from +1.3%.  Today, China’s state run newspaper reported the country’s four largest banks are seeing a “big outflow” of deposits, which are now being channeled to private lending markets. 
    Company news/ratings changes:
    ·         CIM – announced a 3rd quarter dividend of $0.13 per share, compared to $0.13 prior. 
    2Q2011 Earnings.  The second quarter’s earnings results exceeded revenue and earnings expectations.  Of the 484 S&P500 companies that reported earnings to date, 75% (365 out of 484) 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 11.7x estimated 2011 earnings ($99.34) and 10.5x 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 1.10x tangible book value, and 9.8x and 8.0x 2011 and 2012 consensus earnings, respectively, compared to 1.16x 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 +38.3% and +65.2%, respectively.
    Options.  Options markets are neutral.  Composite options markets are neutral, equity options markets are neutral, and index options markets are neutral.  The composite put/call ratio closed at 1.25, compared to 1.11 Tuesday and above its 5- and 10-period moving averages of 1.08 and 1.14, respectively.  The index put/call ratio closed at 1.73, compared to 1.63 Tuesday and above the 5- and 10-period moving averages of 1.45 and 1.47, respectively.  The equity put/call ratio closed the day at 0.80, compared to 0.63 yesterday and above its 5- and 10-period moving averages of 0.68 and 0.71, respectively.
    Wednesday’s equity markets. Volume rose to the 50-day moving average, and equity markets lost substantial ground.  The NYSE, SPX, DJI, and Nasdaq were all lower, off -3.27%, -2.94%, -2.49%, and -2.01%, respectively.  Markets spent the day waiting for the mid-afternoon FOMC rate decision.  Markets opened slightly higher and received a slight bump up after a report showing existing home sales had increased more than anticipated.  However, as the morning wore on, markets gave up those small gains and the SPX fell below 1200.  The late morning and early afternoon were essentially a flat line, with one notable dip and recovery after Moody’s downgraded the long term ratings of BAC and WFC, citing the lessening probability that the U.S. government would support them in a crisis.  The short term ratings of C were also lowered.  At 2:23, the FOMC released its statement in which the committee indicated it would engage “Operation Twist”, inc which it will lengthen the duration of its Treasury portfolio. Investors took note of the FOMC’s statement of “significant downside risks to the economic outlook” and “strains in the global financial markets” and sold the market sharply lower over the last hour of trading. The VIX finished the day at 37.32, up +13.37%.
    Trading desks reported light volume in the morning, but that the afternoon’s volumes post-FOMC announcement were substantially higher.  The complexity of the statement gave markets and investors a bit of a lagged reaction as they digested the meaning of the statement beyond the “Twist”.  Trading desks reported investors overwhelmingly were sellers over the last hour, but that the selling, while intense, was orderly and not panicked.  Both hedge funds and larger accounts lightened equity positions. Investors, who were primarily concerned about the fallout from a European debt crisis, now see the chances for a global economic slowdown or recession increasing after the Fed statement. The AAII Bullish Investor sentiment fell to 25.33 from 30.50 the previous week. The Bloomberg NYSE new net highs were -273 versus the previous day’s reading of -26. The relative strength indicator fell to 39.47 from the previous day’s reading of 46.16, in the lower end of the neutral range.
    Market segments were negative. The leaders were technology, utilities, and telecommunications, while industrials, financials, and basic materials were the laggards.
    Financials sold off significantly. The KRX, BKX, and XLF ended off -5.88%, -5.50%, and -4.95%, respectively.  The BKX began the day higher, but sold off slightly through the early morning. A downgrade by Moody’s of BAC and WFC long term debt and C short term debt caused a brief sell-off a few hours before the FOMC announcement, but financials recovered amid questions as to the cause for the downgrade. Moody’s reasoning for the downgrade was not the financial strength of the individual companies, but rather the lack of support these companies may receive from the US government during a crisis. After the announcement, financials sold off substantially, led by the banks.  The BKX finished with all 24 members lower. Leaders were NTRS, COF, and STT, off only -3.64%.  Laggards were CMA, HBAN, and BAC finishing off at least -7.35%.  The KRX finished with all 50 names lower. The leaders were PRK, PACW, and FRC, while the laggards were HCBK, WTFC, and BPFH. 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 -38.91% below its April 2010 high and -57.12% below its best level of 82.55 in September 2008.
    NYSE Indicators.  Volume rose +30.7% to 1.210 billion shares, from 926.25 million shares Tuesday, 1.00x the 1.215 billion share 50-day moving average.  By significant margins, market breadth was negative, and up volume lagged down volume.  Advancing stocks lagged decliners by -2,152 (compared to -814 the prior day), or 0.17:1.  Up volume lagged down volume by 0.04:1.
    SPX. On higher volume, the SPX fell -35.33 points, or -2.94%, to end at 1166.76.  Volume surged +34.02% to 967.82 million shares, up from 722.14 million shares Tuesday and above the 957.38 million share 50-day moving average.  For the 27th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1220.46 vs. 1283.10 respectively).   The SPX closed above its 200-week moving average (1146.45).
    The SPX opened flat at 1202.  Through 10:15, the index traded sideways but gradually lost support through the morning.  By 11:00, the index declined into negative territory and reached 1995.  Through the 2:20pm Fed policy announcement, the SPX traded between 1193 and 1200.  Markets took the release negatively, and stocks fell to 1190 by 2:25 and 1185 by 2:30.  A round through 3:15 brought the SPX back to 1192, when an aggressive, high volume sell-off took hold.  The index fell nearly -30 points in trading’s final 45 minutes and closed at the intra-day low. 
    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 38h straight session and below 1200 for the first time in five sessions.  The index closed below its April 2010 highs for the 33rd time in the last 34 sessions.  The 50-day moving average has been below the 100-day moving average since July 11th.  The 100-day moving average crossed the 200-day average to the downside on September 7thThe SPX closed (by -1.79%) below its 20-day moving average (1187.99) for the first time in six sessions.  The index closed (by -4.40%) below its 50-day moving average for the 40th straight session.  The index closed (by -7.98%) below its 100-day moving average (1267.95) for the 39th straight session.  The SPX closed -9.07% below its 200-day moving average, closing below that average for the 35th straight session.  The 20-day moving average rose.  The directional momentum indicator is negative for the 38th straight session, and the trend is moderate and declining.  Relative strength fell to 44.13 from 51.33, a neutral range.  Next resistance is at 1193.30; next support is at 1153.21.
    BKX.  On higher volume, the KBW bank index fell -2.06 points, or -5.50%, to end at 35.40, its 35th close below the prior 52-week low of 42.70 from August 25, 2010 and its 32nd straight sub-40 close.  Volume surged 72.43% to 121.36 million shares, up from 70.38 million shares Tuesday and above the 113.71 million share 50-day averageThe BKX closed -17.64% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -38.91% and -36.37% 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 to 37.50 and traded sideways through 10:00.  A small move lower at 10:00 sent the index into negative territory at the 37.25 level.  Through 12:25, the index traded sideways when Moody’s cut the credit ratings of Bank of America, Wells Fargo, and Citigroup.  Despite the downgrades being well telegraphed and resulting from non-operating (ie less implicit U.S. federal support) reasons, the market took the news poorly.  By 12:30, the index dropped below 37.00 to 37.85 and fell further at 12:45 to 36.40.  By 1:10, the BKX had mostly recovered from the ignorant selling and climbed back to 37.00.  The rally continued up through the Fed’s 2:20 policy announcement, when the index stood at 37.20.  Like the broader market, banking stocks reacted poorly to the policy decision.  By 2:35, the index fell to 36.50.  A stronger, high volume sell-off took hold at 3:15, and the index fell -3.8% in trading’s final 45 minutes to close at the intra-day low. 
    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 (40.67) crossed below the 100- and 200-day moving averages (44.64 and 48.58, respectively) on April 25th and June 16th.  The 20-day closed (by -2.80 points) below the 50-day for the 133rd straight day, but the gap narrowed.  The 50-day moving average closed (by -7.92 points) below the 200-day moving average for the 70th straight session, and the gap expanded.  The 100-day moving average closed (by -3.94 points) below the 200-day moving average for the 48th straight session, and the gap expanded.  The BKX closed below its 20-, 50-, 100-, and 200-day moving averages for the 2nd, 52nd, 53rd, and 78th consecutive sessions, respectively.  The index closed below 50.0 for the 78th straight session and below 40.00 for the 32nd straight session.  The directional movement indicator is negative for the 41st straight session, and the trend is moderate and declining.  Relative strength fell to 38.29 from 45.01, the lower end of a neutral range.  Next resistance is36.88; next support at 34.65.
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