This morning. U.S. equity markets in correction. Equity options markets suggest a neutral short-term outlook. Asian markets closed lower on global recessionary concerns. Eurozone equities are rallying strongly, with particular strength in financials. The U.S. dollar is weaker. Commodities markets are mixed, with continued weakness across the metals complex. U.S. Treasury prices are lower. LIBOR markets suggest continued interbank lending credit concerns, though Euribor-OIS spreads are slightly lower today. After a fair value adjustment of +0.83 points, September SPX equity futures are at 1144.10, up +13.57 points. The SPX opens at 1136.43, -16.7% below its recent April 29 multi-year closing high, -4.05% below its 20-day and -6.33% below its 50-day moving averages. The SPX is -9.64% below its 1257.64 year-end close. Next resistance is at 1144.98; next support is at 1124.62.
Friday. U.S. equities rose, ending several days’ consecutive losses and rebounding modestly from Thursday’s 2011 lows. Markets opened lower, but found support and quickly rallied to breakeven by mid-morning. Trading took indexes higher through most of the day’s remainder, but without much conviction, as indicated by the day’s lower volume. Bond yields fell. The Nasdaq posted the best gain, rising +1.12%. The NYSE composite, SPX, and DJI rose +0.66%, +0.61%, and +0.35%, respectively. On the SPX, the intraday low was 1121.36, just minutes after the open. The SPX was tested 1135 at 10:00, traded back to a loss by 10:30, and then rallied again to the 1140 level. The intraday high was 1141.72 at 2:00. Most market segments closed higher. Financials led with a +1.19% gain, followed by consumer services, and technology. Health care, basic materials, and oil and gas were the laggards. Volatility fell -0.24%, as the VIX ended at 41.25, down 41.35 the prior day.
In Asia, equity markets closed at fresh 2011 lows. Tokyo and Shanghai closed near their intraday lows. Hong Kong rallied through the afternoon. Volume rose in Japan, but volumes fell in China. Commentary cited growing global recessionary concerns.
In Japan, equity markets reopened after Friday’s holiday. On a +27.2% volume increase, the Nikkei lost -2.17%, closing at 8,374.13, -18.1% below the 2010 close. The NKY saw strong selling through the morning and traded sideways into the close to end near the 8359.70 intraday low. Utilities, consumer services, and health care gained at least +0.24%. Financials shed -1.91%. Industrials, oil and gas, and telecommunications were the worst performers, losing at least -3.73%.
In China, the Hang Seng and Shanghai composite closed at 17,407.80 and 2,398.18, respectively, down -1.48% and -1.64%. In Hong Kong, volume fell -24.4%. The HSI moved briefly higher at the open, but trended lower through mid-afternoon to an intraday low at 16,999.50, where it found support and rallied into the close. Only utilities closed higher. Telecommunications and oil and gas were the other leaders. Financials, consumer services, and industrials were the laggards, off at least -1.98%. The HSI is off -24.4% in 2011. In Shanghai, volume fell -16.0%. The SHCOMP opened lower, but briefly traded higher before coming under pressure and trending lower through most of the day. The SHCOMP saw its 2384.64 intraday close about a half hour before the close. All market segments closed lower. Segment leaders were oil and gas, utilities, and industrials. Health care, financials, and telecommunications, closed off at least -1.83%. The SHCOMP closed -14.8% below its 2010 close and -7.71% below its 50-day moving average.
In Europe, equities markets are surprisingly strong, with especial strength in financials, which are leading gainers with a +6.28% rise. The Euro Stoxx 50, FTSE, and DAX are up +3.37%, +1.01%, and 3.17%, respectively. On the EuroStoxx50, all market segments are up at least +1.41%. In addition to financials, utilities and basic materials are the leaders. Technology, consumer services, and consumer goods are the laggards, but are up at least +1.50%.
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 Friday, but down from 0.25188% at year-end. USD 3-month LIBOR rose to 0.36278%, the highest level of the year, from 0.36022% the prior day.
· The US Libor-OIS (LOIS) spread rose to 27.6 bps, from 27.1 bps the prior day and 12.0 bps at the end of 2010. Euribor-OIS rose to 89.0 bps from 89.3 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 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 is weaker this morning against the euro, yen, and pound. The dollar trades at US$78.069, compared to US$78.501 the prior day, and above its US$75.108 50-day, US$75.060 100-day, and US$76.058 200-day averages. The euro trades at US$1.3521, compared to US$1.3500 Thursday and US$1.3465 the prior day. The euro trades below its US$1.4147 50-day and US$1.4227 100-day averages. In Japan, the dollar trades at ¥76.31, compared to ¥76.61 Thursday and ¥76.24 the prior day. The yen trades better than its 50-day moving average ¥77.179.
· U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.214% and 1.849%, respectively, compared to 0.216% and 1.833% Friday. The yield curve widened to 1.635% from +1.617% 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 mixed, with higher petroleum, lower precious metals, aluminum and copper, and higher agricultural prices.
U.S. news and economic reporting. U.S. economic reports include the August Chicago Fed national activity index at 8:30, August new home sales at 10:00, and the September Dallas Fed manufacturing activity report at 10:30.
Overseas news: This weekend, press reports indicate that European officials discussed enlarging the size of the emergency bailout fund while simultaneously developing plans for a Greek default. In September, the German IFO business climate and expectations surveys declined less than expected. On Sunday, French President Sarkozy’s conservative party lost its majority in the Senate during following regional election results.
Company news/ratings changes:
· SBNY – upgraded to buy at Sandler O’Neill, $60 price target
· UBS – Oswald Gruebel resigns as CEO, replaced by Segio Ermotti as interim CEO
2Q2011 Earnings. The second quarter’s earnings results exceeded revenue and earnings expectations. Of the 489 S&P500 companies that reported earnings to date, 75% (369 out of 489) 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 ($99.33) and 10.2x estimated 2012 earnings ($111.34), compared to 11.4x and 10.1 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 +5.0%, 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 1.09x tangible book value, and 9.9x and 7.9x 2011 and 2012 consensus earnings, respectively, compared to 1.08x tangible book value and 9.8x/7.8x 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 +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 1.15, compared to 1.25 Friday and above its 5- and 10-period moving averages of 1.15 and 1.13, respectively. The index put/call ratio closed at 1.54, compared to 1.53 Friday and in between the 5- and 10-period moving averages of 1.56 and 1.47, respectively. The equity put/call ratio closed the day at 0.67, compared to 0.84 Friday and below its 5- and 10-period moving averages of 0.71 and 0.70, respectively.
Friday’s equity markets. On lower volume, equity markets rebounded modestly after the prior 4 day’s losses. The Nasdaq, NYSE, SPX, and DJI gained +1.12%, +0.66%, +0.61%, and +0.35%, respectively. Markets began the morning indicated lower as European markets reflected continued turmoil. SPX futures reached their lowest point at 8:00 am. On the open, indexes fell but immediately reversed to a small gain. Trading was choppy, with gains followed by sell-offs through most of the day. The day ended with a rally, but well off its intraday highs. Headlines from the IMF/World Bank conference drove the trade. Comments concerned the best next step to prevent/contain a Greek sovereign debt default. The VIX finished the day at 41.25, off -0.24%, but elevated for the week.
Trading desks reported that many investors were on the sidelines. They noticed light volumes and directionless trading patterns. Faster investors were involved, but traders commented how the market gyrations had short-term traders unable to discern clear patterns. The Bloomberg NYSE new net highs were -258, an improvement over the previous reading of -739. The relative strength indicator increased to 35.51 from the previous reading of 33.78 and is in the upper end of the oversold range.
Market segments were mixed. Financials, consumer services, and technology were the leaders, while health care, basic materials, and oil and gas were the laggards.
Financials outperformed. The BKX rose +1.60%, while the KRX and XLF were both up +1.04%. Financials gained on rumors of an expanded ECB debt repurchase program. This was a rehash of July headlines, but many took it as an increased repurchase plan. The BKX finished the day with 21 names higher and 3 lower. The leaders were NYB, C, and BAC, each up at least +4.13%. The laggards were BK, STT, and KEY, off at least -0.64%. The KRX finished with 39 names higher, 10 lower and 1 unchanged. The leaders were VLY, PRK, and PACW, while the laggards were SNV, TCB, and BXS. Among broader financials, MS, CBG, and EQR were leaders, while AFL, LNC, and AON were laggards. 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 -39.60% below its April 2010 high and -57.60% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume fell -28.3% to 1.230 billion shares, from 1.716 billion shares Thursday, 0.99x the 1.228 billion share 50-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +800 (compared to -2,395 the prior day), or 1.73:1. Up volume led down volume by 2.01:1.
SPX. On lower volume, the SPX rose +6.87 points, or +0.61%, to end at 1136.43. Volume fell -29.35% to 951.96 million shares, down from 1.348 billion shares Thursday and below the 975.65 million share 50-day moving average. For the 29th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1213.25 vs. 1282.17 respectively). The SPX closed below its 200-week moving average (1146.30) for the second straight session.
The SPX gapped lower at the open to 1122, but turned positive by 9:45 and continued rallying through 10:00 to reach 1135. The rally was sold at 10:00, and by 10:25, the index retraced back to 1124. A second morning rally took hold at 10:30, and the index climbed back into positive territory by 10:50 and rose to 1140 by 11:25. Unable to cross through 1140, the index retraced back to the 1129 break-even line by 12:45. A rally at 1:00 returned the index to 1140 by 2:00 and set the intra-day high of 1141.72 at 2:03. Through 3:00, the index again retraced to its break-even, and a closing bell rally lifted the index above 1135 to close the SPX with modest gains on the day.
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 40th straight session and below 1200 for the third straight session. The index closed below its April 2010 highs for the 35th time in the last 36 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 7th. The SPX closed (by -4.05%) below its 20-day moving average (1184.45) for the third straight session. The index closed (by -6.33%) below its 50-day moving average for the 42nd straight session. The index closed (by -10.05%) below its 100-day moving average (1263.43) for the 41st straight session. The SPX closed -11.37% below its 200-day moving average, closing below that average for the 37th straight session. All moving averages fell. The directional momentum indicator is negative for the 40th straight session, and the trend is moderate and declining. Relative strength rose to 39.72 from 38.07, the low end of a neutral range. Next resistance is at 1144.98; next support is at 1124.62.
BKX. On lower volume, the KBW bank index rose +0.55 points, or +1.60%, to end at 35.00, its 37th close below the prior 52-week low of 42.70 from August 25, 2010 and its 34th straight sub-40 close. Volume fell -33.53% to 107.82 million shares, down from 162.21 million shares Thursday and below the 115.96 million share 50-day average. The BKX closed -18.57% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -39.60% and -37.08% below its April 23, 2010, and February 14, 2011 respective closes.
Financials were the market’s best performing sector, and outperformed the market, and large-cap banks outperformed regional banks. The BKX gapped lower to 34.20 but quickly turned positive on the day. By 10:00, the index rose to 34.85. Through 10:25, a sell-off retraced gains back to the 34.45 break-even line. A second rally at 10:25 lifted the index to 35.00 by 10:55 and to 35.18 at 11:25. A small sell-off to 34.80 at noon was bought, and by 12:18, the index was back to 35.20 and set the intra-day high. Unable to move higher, the index traded mostly sideways through 2:15 when a sell-off dropped the BKX back to 34.60 by 3:00. A closing bell rally lifted financials back to 35.00 at the close and the index closed near the high end of its daily trading range.
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 (40.19) crossed below the 100- and 200-day moving averages (44.30 and 48.42, respectively) on April 25th and June 16th. The 20-day closed (by -2.62 points) below the 50-day for the 135th straight day, but the gap narrowed. The 50-day moving average closed (by -8.24 points) below the 200-day moving average for the 72nd straight session, and the gap expanded. The 100-day moving average closed (by -4.12 points) below the 200-day moving average for the 50th straight session, and the gap expanded. The BKX closed below its 20-, 50-, 100-, and 200-day moving averages for the 4th, 54th, 55th, and 80th consecutive sessions, respectively. The index closed below 50.0 for the 80th straight session and below 40.00 for the 34th straight session. The directional movement indicator is negative for the 43rd straight session, and the trend is moderate and declining. Relative strength rose to 38.30 from 35.64, the lower end of a neutral range. Next resistance is 35.40; next support at 34.40.