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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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  • U.S. Equities Move Back Into Correction, U.S. Futures Lower, But Improving 0 comments
    Sep 23, 2011 9:19 AM | about stocks: USB, BAC, RF, C, CBU, FFNT, FULT, NLY, SNV, PVTB, UMPQ, BEN, GNW, MET, FFI, HCBK, CB
    This morning.  U.S. equity markets are again in correction, ending an uptrend confirmed on August 22nd. Equity options markets suggest a neutral short-term outlook.  Asian markets closed lower on global recessionary concerns. On similar concerns, Eurozone equities are moving substantially lower. The U.S. dollar has strengthened during the morning’s trade, while the euro has weakened. Commodities markets continue to sell off.  U.S. Treasury prices are higher, with the narrowest spread between 2- and 10-year Treasuries since 2008.  LIBOR markets suggest continued interbank lending credit concerns.   Euribor-OIS spreads are higher.  After a fair value adjustment of +0.11 points, September SPX equity futures are at 1119.10, down -4.51 points.  The SPX opens at 1129.56, -17.2% below its recent April 29 multi-year closing high, -4.73% below its 20-day and -7.16% below its 50-day moving averages.  The SPX is -10.2% below its 1257.64 year-end close.  Next resistance is at 1193.30; next support is at 1153.21.
    Thursday.  U.S. equities extended Wednesday’s losses, and all indexes closed at new 2011 lows. Markets gapped lower and most of the losses were concentrated in the first minutes of the day, and markets traded sideways through most of the day’s remainder. Bond yields continued to fall. The NYSE composite lost -3.65%, followed by the DJI, Nasdaq, and SPX lost -3.51%, -3.25%, and -3.19%, respectively. On the SPX, the intraday low was 1114.22, -4.50% below the 1166.76 prior close. All market segments closed at least -1.81% lower.  Utilities, telecommunications, and consumer goods were the better segments. Financials closed off -3.00%.  Laggards were industrials, oil and gas, and basic materials, which closed off -3.74%. Volatility rose another 10.8%, as the VIX ended at 41.35, up from 37.32 the prior day.
    The losses of the past two days were sufficient to end the recent market uptrend and push markets again into correction.
    In Asia, equity markets closed moderately lower, at new yearly lows, but well off the worst levels of the day.  Japan was closed for an autumnal equinox holiday. Volume was higher in Hong Kong, but lower in Shanghai.  Commentary cites growing recessionary concerns.
    In China, the Hang Seng and Shanghai composite closed at 17,688.83 and 2,433.16, respectively, down -1.36% and -0.41%.  In Hong Kong, volume rose +48.7%.  The HSI gapped lower and touched its 17,373.40 intraday low at mid-morning. Stocks trended higher to test resistance unsuccessfully at 17,800 in mid-afternoon, and gave ground into the close. Market segments closed mixed, with technology, and industrials higher. Financials, consumer services, and telecommunications closed at least -1.77% lower. The HSI is off -23.3% in 2011.  In Shanghai, volume fell -10.6%.  The SHCOMP gapped down about -1.0% to an intraday low of 2,400.14, but rallied through the morning and twice tested resistance at 2,440 before trending lower through mid-afternoon. The index rallied through the final two hours. Market segments closed mixed. Segment leaders were telecommunications, oil and gas, and industrials. Financials lost -0.27%. Consumer services, health care, and consumer goods were the laggards, off at least -0.75%.  The SHCOMP closed -13.4% below its 2010 close and -6.44% below its 50-day moving average.
    In Europe, equities markets are again trading substantially lower and are presently trading near their intraday lows. The Euro Stoxx 50, FTSE, and DAX are down -2.36%, -1.82%, and -2.72%, respectively.  On the EuroStoxx50, all market segments are down at least -1.60%.  The better segments are health care, telecommunications, and consumer services. Financials are off -1.98%. Basic materials, technology, and industrials are off at least -2.91%. 
    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 Thursday, but down from 0.25188% at year-end.  USD 3-month LIBOR rose to 0.36022%, the highest level of the year, from 0.35806% the prior day.
    ·         The US Libor-OIS (LOIS) spread rose to 27.2 bps, from 27.1 bps the prior day and 12.0 bps at the end of 2010.  Euribor-OIS rose to 88.1 bps from 83.3 Thursday, 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 5 bps, unchanged from the prior day, 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 Wednesday’s FOMC statement, but it is mixed this morning, stronger against the euro and yen, but weaker compared to the pound. The dollar trades at US$78.411, compared to US$78.455 the prior day, and above its US$75.054 50-day, US$75.025 100-day, and US$76.070 200-day averages.  The euro trades at US$1.3449, compared to US$1.3465 Wednesday and US$1.3573 the prior day.  The euro trades below its US$1.4158 50-day and US$1.4235 100-day averages.  In Japan, the dollar trades at ¥76.27, compared to ¥76.24 Wednesday and ¥76.46 the prior day.  The yen trades better than its 50-day moving average ¥77.227.
    ·         U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.196% and 1.720%, respectively, compared to 0.198% and 1.718% Thursday.  The yield curve widened to 1.524% from +1.520% the prior day.  In the past year, the 2- and 10-year spread has varied from a low of +1.520% 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.   There are no U.S. economic reports of note today.
    Overseas news: Today, the G20 finance ministers issued a communiqué reaffirming their commitment to preserve the banking system’s and financial market’s stability.  Today, press reports indicate Greece’s finance minister has told ruling party lawmakers the country faces the risk of a disorderly default with a -50% write down of the country’s debt.  Today, Moody’s cut eight Greek banks’ credit ratings by 2 notches with most going to Caa2.  In September, French consumer confidence and business sentiment indicators both fell more than expected. 
    Company news/ratings changes:
    ·         NLY – upgraded to neutral at UBS, $17 price target
     
    2Q2011 Earnings.  The second quarter’s earnings results exceeded revenue and earnings expectations.  Of the 488 S&P500 companies that reported earnings to date, 75% (368 out of 488) 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 +16.4% 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 11.4x estimated 2011 earnings ($99.32) and 10.1x estimated 2012 earnings ($111.34), compared to 11.7x and 10.5 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 +17.1% and +31.3%, respectively. 
    Large-cap banks trade at a median 1.08x tangible book value, and 9.8x and 7.8x 2011 and 2012 consensus earnings, respectively, compared to 1.10x tangible book value and 9.8x/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 +38.2% 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 1.25 yesterday and above its 5- and 10-period moving averages of 1.13 and 1.15, respectively.  The index put/call ratio closed at 1.53, compared to 1.73 yesterday and above the 5- and 10-period moving averages of 1.51 and 1.48, respectively.  The equity put/call ratio closed the day at 0.84, compared to 0.80 yesterday and above its 5- and 10-period moving averages of 0.71 and 0.72, respectively.
    Thursday’s equity markets.  On heavy volume, the equity markets fell substantially.  The NYSE, DJI, Nasdaq, and SPX finished  off -3.65%, -3.51%, -3.25%, and -3.19%, respectively.  Investors continued a two-day sell off that began late Wednesday after the FOMC statement.  Investors received additional indications of a global economic slowdown after weak Chinese PMI. The latest week’s initial jobless claims rose minimally. Also, August’s leading economic indicators increased more than anticipated.  Still, futures were off substantially at the open, following losses in Asia and Europe. Markets opened well below Wednesday’s close.  The SPX broke support at 1120 to an intraday low of 1114. In the last half hour, markets rallied, with the SPX adding 15 points. Volatility spiked again, with the VIX at 41.35, up +10.80%.
    Trading desks reported the day felt much like July and August as investors rushed to de-risk their portfolios.  Early in the session, some desks reported that they were better buyers as shorts covered from the previous day’s trading.  After the first hour, the selling was constant, but never panicked.  Traders reported that the sellers were larger accounts liquidating positions and short sellers adding to positions.  Volumes were extremely heavy, nearly the volume from last week’s quadruple options expiration. Investors remain attuned to headline risk, with investors buying and selling on any headline involving Europe, its debt crisis, or any economic news from a developed economy.  The Bloomberg NYSE new net highs were -739 versus the previous day’s reading of -273 and almost equaling the drop we saw in early August. The relative strength indicator fell to 33.78 versus the previous day’s reading of 39.47 and is in the upper end of the oversold range.
    Market segments were all negative. Utilities, telecommunications, and consumer goods were the leaders, while industrials, oil and gas and basic materials were the laggards.
    Financials outperformed the broader indices. The XLF, BKX, and KRX were off, down -2.86%, -2.68%, and -1.33%, respectively. Financials sold off with the rest of the market as investors come to the realization that pre-payments on refinancing and reinvested dollars and lower yields will hurt interest margins in financials. Operation Twist’s goal of flattening the yield curve, while good for consumers, might be bad for institutions that earn their money by making a spread from that curve. Brokers, asset managers and life insurance names were also very weak. The BKX finished the day with 1 name higher and 23 lower. The sole gainer was USB, while BAC, RF, and C were the weakest, off at least -5.02%. The KRX finished the day with 11 names higher and 39 names weaker. CBU, FFIN, and FULT lead the gainers, while SNV, PVTB, and UMPQ. Among broader financials, BEN, GNW and MET were the worst performers off at least -7.17%. The best performers were FII, HCBK, and CB, up at least +0.64%. 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 -40.55% below its April 2010 high and -58.27% below its best level of 82.55 in September 2008.
    NYSE Indicators.  Volume rose +41.8% to 1.716 billion shares, from 1.210 billion shares Wednesday, 1.39x the 1.227 billion share 50-day moving average.  By significant margins, market breadth was negative, and up volume lagged down volume.  Advancing stocks lagged decliners by -2,395 (compared to 2,152 the prior day), or 0.13:1.  Up volume lagged down volume by 0.05:1.
    SPX. On significantly higher volume, the SPX fell -37.20 points, or -3.19%, to end at 1129.56, its largest decline since August 18th’s -4.46% drop.  Volume surged +39.23% to 1.348 billion shares, up from 967.82 million shares Wednesday and above the 991.03 million share 50-day moving average.  For the 28th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1216.70 vs. 1282.63 respectively).   The SPX closed below its 200-week moving average (1146.27) for the first straight session.
    The SPX gapped lower at the open to 1145, down -2.0% and immediately setting the intra-day high.  Through 10:00, the index declined to 1130.  At 10:00, a rebound lifted the market back to 1142 by 10:25.  The index spend the remainder of the 10:00 hour attempted to break through the 1140 level convincingly.  Failing to do so, momentum reversed, and the index declined through 12:30 to 1125.  By 1:00, another rebound lifted the index back to 1135.  Momentum turned negative again, and through 2:00, the SPX declined to 1120.  Headlines that the European Union would accelerate bank recapitalizations hit at 2:20, and the index surged back above 1130 by 2:30.  The positive momentum waned, and the index returned to its prior descent, falling to 114.22 at 3:25, setting the intra-day low and down -4.5% intra-day.  A closing bell rally lifted the index back through 1130 by 3:50, but the index could not hold that level at the close. 
    Technical indicators are neutral to negative.  The market returned to correction after the September 21st and 22nd sessions’ losses in significantly higher volume.  The SPX closed below 1300 for the 39th straight session and below 1200 for the second straight session.  The index closed below its April 2010 highs for the 34th time in the last 35 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 -4.73%) below its 20-day moving average (1185.59) for the second straight session.  The index closed (by -7.16%) below its 50-day moving average for the 41st straight session.  The index closed (by -10.75%) below its 100-day moving average (1265.63) for the 40th straight session.  The SPX closed -11.93% below its 200-day moving average, closing below that average for the 36th straight session.  All moving averages fell.  The directional momentum indicator is negative for the 39th straight session, and the trend is moderate and declining.  Relative strength fell to 38.07 from 44.13, the low end of a neutral range.  Next resistance is at 1158.00; next support is at 1107.67.
    BKX.  On higher volume, the KBW bank index fell -0.95 points, or -2.68%, to end at 34.45, its 36th close below the prior 52-week low of 42.70 from August 25, 2010 and its 33rd straight sub-40 close.  Volume surged 33.66% to 162.21 million shares, up from 121.36 million shares Wednesday and above the 115.52 million share 50-day averageThe BKX closed -19.85% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -40.55% and -38.07% below its April 23, 2010, and February 14, 2011 respective closes.
    Financials outperformed the market, and regional banks outperformed large-cap banks.  The BKX gapped lower to 34.40 and quickly declined to 34.20 by 9:35.  Through 10:20, a rally took the index up to 34.95, still down -1.3% but setting the intra-day high.  Through 12:00, the BKX retraced back to 34.20 before a 12:25 rebound lifted the index to 34.50 by 1:00.  Through 2:00, negative momentum returned, and the index fell through 34.00 and to 33.90.  Volatility took hold after the 2:20 headlines from the European Union regarding accelerated bank recapitalization plans, and the BKX rebound +0.50 points in 2 minutes, returning to 34.60.  The rally was short lived, and financials resumed their decline at 2:50.  By 3:25, the index fell to 33.82, setting the intra-day low and down -4.46%.  A closing bell rally lifted the index back to 34.50, but the BKX could not hold that level at the close.
    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 (40.42) crossed below the 100- and 200-day moving averages (44.47 and 48.50, respectively) on April 25th and June 16th.  The 20-day closed (by -2.71 points) below the 50-day for the 134th straight day, but the gap narrowed.  The 50-day moving average closed (by -8.09 points) below the 200-day moving average for the 71st straight session, and the gap expanded.  The 100-day moving average closed (by -4.03 points) below the 200-day moving average for the 49th straight session, and the gap expanded.  The BKX closed below its 20-, 50-, 100-, and 200-day moving averages for the 3rd, 53rd, 54th, and 79th consecutive sessions, respectively.  The index closed below 50.0 for the 79th straight session and below 40.00 for the 33rd straight session.  The directional movement indicator is negative for the 42nd straight session, and the trend is moderate and declining.  Relative strength fell to 35.64 from 38.29, the lower end of a neutral range.  Next resistance is 35.18; next support at 33.77.
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