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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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  • U.S. Futures Up on Quarter-End Window Dressing, Hopeful Eurozone Noise 0 comments
    Sep 27, 2011 8:51 AM | about stocks: HBAN, STI, C, BK, PBCT, FNFG, SNV, FRC, TCB, FHN, MBFI, CVBF
    This morning.  Despite yesterday’s strong equity gains, U.S. equity markets remain in correction.  Equity options markets suggest a neutral to bearish short-term outlook.  Asian markets closed substantially higher, rallying from 2-year lows and on optimism that Eurozone sovereign issues are manageable. Eurozone equities are again rallying strongly, with particular strength in financials.  The U.S. dollar is weaker.  Commodities markets are mostly higher, though copper and aluminum are lower. 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 -1.25 points, December SPX equity futures are at 1175.90, up +18.55 points.  The SPX opens at 1162.95, -14.7% below its  April 29 multi-year closing high, -1.76% below its 20-day and -3.90% below its 50-day moving averages.  The SPX is -7.53% below its 1257.64 year-end close.  Next resistance is at 1174.40; next support is at 1141.28.
    Monday.  U.S. equity markets survived a weak opening and rallied through the afternoon to close at their intraday highs and with impressive gains. The DJI led with a +2.53% gain, followed by the NYSE composite, SPX, and Nasdaq, which enjoyed gains of +2.51%, +2.33%, and +1.35%, respectively. Bond yields fell.  On the SPX, the index opened above 1145, but on weak economic news traded back nearly to 1130 before rallying back to test 1150 at noon. Markets resisted the advance, and the SPX trailed back to 1140 at 1:30, when a rally ensued that continued unabated through the close. The SPX closed at 1162.95, just short of its 1164.19 intraday high. All market segments closed at least +0.90% higher.  Financials led with a +4.15% gain, followed by oil and gas and basic materials. Telecommunications, technology, and utilities were the laggards.  Volatility fell -5.41%, as the VIX ended at 39.02, down from 41.35 the prior day’s close.

    In Asia,
    on lower volume, equity markets rallied from 2-year lows, as investors took advantage of oversold conditions and renewed optimism that Eurozone sovereign issues would be adequately, if not well managed. Tokyo and Hong Kong rallied through the day and closed at their respective intraday highs. Shanghai trended lower until mid-afternoon, then rallied strongly into the final hour, when profit taking reduced the day’s gains.
    In Japan, the Nikkei rose +2.82%, the most since March, on a -12.0% decrease in volume. The NKY gapped higher, gained strength through the day, and rallied sharply into the close to end at 8609.95, the intraday high. Best segments were technology, industrials, and financials, which rallied at least +3.23%. Oil and gas, utilities, and telecommunications were the laggards, with the latter segment the only loser. The NKY is down -15.8% in 2010 and -5.97% below its 50-day moving average.
    In China, the Hang Seng and Shanghai composite closed at 18,130.55 and 2,415.05, respectively, up +4.15% and +0.91%.  In Hong Kong, volume fell -11.3%.  The HSI gapped higher at the open, but trended sideways through the mid-afternoon, then rallied strongly through the final 90 minutes to closed just off its 18,136.02 intraday high. All market segments closed higher. Leaders were oil and gas, consumer goods, and financials, which rose at least +4.45%. Telecommunications, technology, and utilities were the laggards. The HSI is off -21.3% in 2011.  In Shanghai, volume fell -12.4%.  The SHCOMP also gapped higher, but met resistance at 2,420 and lost most of its gains by early afternoon. The index rallied, again testing resistance at 2,420, rising to an intraday high of 2423.91, but failing to hold that level. All segments closed at least +0.39% higher. Leaders were basic materials, consumer goods, and telecommunications, which gained at least +0.96%. Financials added +0.95%. Laggards were industrials, health care, and technology. The SHCOMP closed -14.0% below its 2010 close and -6.56% below its 50-day moving average.
    In Europe, equities markets are again surprisingly strong, with particular strength in financials, which are leading gainers with a +6.30% rise.  The Euro Stoxx 50, FTSE, and DAX are up +4.24%, +3.08%, and +4.34%, respectively.  The indexes are presently near their intraday highs. On the EuroStoxx50, all market segments are up at least +1.95%.  In addition to financials, utilities and industrials are the leaders, up at least +4.49%.  Consumer goods, telecommunications, and health care are the laggards, but up at least +1.84%. 
    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 0.14500%, compared to 0.14611% Monday, but down from 0.25188% at year-end.  USD 3-month LIBOR rose to 0.36522%, the highest level of the year, up from 0.36278% the prior day and comparing to 0.30281% at year-end 2010.
    ·         The US Libor-OIS (LOIS) spread rose to 27.9 bps, from 27.6 bps the prior day and 12.0 bps at the end of 2010.  Euribor-OIS fell to 82.9 bps from 87.6 bps Monday, 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 widened to 16 bps, unchanged from the prior day, and equal to the 16 bps on September 15th, but well off from a recent high of 33 bps on August 2nd.
    ·         The U.S. dollar is slightly weaker this morning against the euro, yen, and pound.  The dollar trades at US$78.047, compared to US$78.363 the prior day, and above its US$75.170 50-day, US$75.097 100-day, and US$76.046 200-day averages.  The euro trades at US$1.3541, compared to US$1.3533 Friday and US$1.3500 the prior day.  The euro trades below its US$1.4135 50-day and US$1.4218 100-day averages.  In Japan, the dollar trades at ¥76.44, compared to ¥76.36 Friday and ¥76.15 the prior day.  The yen trades better than its 50-day moving average ¥77.125.
    ·         U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.239% and 1.954%, respectively, compared to 0.227% and 1.900% Monday.  The yield curve widened to 1.715% from +1.673% 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 generally higher, with higher petroleum, precious metals, lower aluminum and copper, and higher agricultural prices.
    U.S. news and economic reporting.   U.S. economic reports include the July Case-Shiller home price index, and at 10:00, September consumer confidence and the Richmond Fed manufacturing index.
    Overseas news: Today, the Greek parliament votes on a new property tax law, a requirement for receiving the next bailout funding tranche.  Today, Spain sold €3.2 billion of three- and six-month bills, with yields on the three month bills climbing 34 basis points to 1.69% at a bid-to-cover ratio of just 2.47 times compared to 7.6x in August’s auction and a 6.5x average over the prior six auctions.  Today, news reports speculate clearing houses will impose higher haircuts on Italian government bonds used in repo transactions. 
    Company news/ratings changes:
    ·         None.
     
    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 11.7x estimated 2011 earnings ($99.36) and 10.4x estimated 2012 earnings ($111.34), compared to 11.4x and 10.2 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 1.14x tangible book value, and 10.5x and 8.1x 2011 and 2012 consensus earnings, respectively, compared to 1.09x tangible book value and 9.9x/7.9x 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 to bearish.  Composite options markets are bearish, index options markets are neutral, and equity options markets are neutral to bearish.  The composite put/call ratio closed at 1.03, compared to 1.15 yesterday and below its 5- and 10-period moving averages of 1.16 and 1.10, respectively.  The index put/call ratio closed at 1.51, compared to 1.54 yesterday and in between the 5- and 10-period moving averages of 1.59 and 1.47, respectively.  The equity put/call ratio closed the day at 0.64, compared to 0.67 yesterday and below its 5- and 10-period moving averages of 0.72 and 0.69, respectively.
    Monday’s equity markets. On mixed volume, equity markets finished the day higher.  The DJI, NYSE, SPX, and Nasdaq rose +2.53%, +2.51%, +2.33%, and +1.35%, respectively.  Markets opened the day higher, but sold off in the first hour to their intraday lows on negative comments from German Finance Minister Schaeuble about expanding the European Financial Stability Facility’s volume above €440 billion.  Markets rebounded in the late morning as ECB Governing Council member Nowotny indicated there may be “good reason” to reintroduce loans with maturities greater than 6 months.  Markets rallied from mid-afternoon to the bell on these hopeful comments and in anticipation of some grand Eurozone bargain that would resolve its debt crisis. The VIX finished the day at 39.02, off -5.41%.
    Trading desks indicated that the afternoon saw a volume pick-up, especially in financials.  They also noticed a lack of determined sellers and shorts.  One desk commented that the various meetings and summits among the leadership in Europe could explain the “hopeful” tone to the markets.  Sellers and shorts might be waiting for the quarter end to add additional positions. The Bloomberg NYSE new net highs were -213 versus the previous day’s reading of -258. The relative strength indicator increased to 41.83 from 35.51 and is in the lower end of a neutral range.
    Market segments were all positive. Financials, oil and gas, and basic materials were the leaders, while telecommunications, technology and utilities were the laggards.
    Financials outperformed the broader markets by a large margin. The BKX, XLF, and KRX were all significantly higher, finishing up +5.29%, +4.45%, and +3.44%. Financials received a boost in the pre-market after Warren Buffet indicated that he would be using his significant cash position to repurchase shares in BRK.A and BRK.B. This marks the first time that Mr. Buffet has utilized the buyback with regards to Berkshire Hathaway. Most financials had good bids throughout the morning, but the buying intensified in the afternoon as the “hope” trade for some resolution to the European debt crisis took hold. Trading desks we spoke with indicated that large institutions were buyers into the close of this oversold group. The BKX finished with all 24 names higher. The leaders were HBAN, STI, and C, up at least +6.97%. The laggards in the BKX included BK, PBCT, and FNFG. The KRX finished with all 50 names higher. The leaders were FHN, MBFI, and CVBF, up at least +5.52%. The laggards were SNV, FRC, and TCB. 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 -36.41% below its April 2010 high and -55.36% below its best level of 82.55 in September 2008.
    NYSE Indicators.  Volume fell -5.89% to 1.157 billion shares, from 1.230 billion shares Friday, 0.93x the 1.240 billion share 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +1,401 (compared to +800 the prior day), or 2.72:1.  Up volume led down volume by 8.74:1.
    SPX. On lower volume, the SPX rose +26.52 points, or +2.33%, to end at 1162.95.  Volume fell -3.56% to 918.12 million shares, down from 951.96 million shares Friday and below the 976.32 million share 50-day moving average.  For the 30th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1210.19 vs. 1281.82 respectively).   The SPX closed below its 200-week moving average (1144.71) for the second straight session.
    The SPX gapped higher at the open to 1147 but declined through 10:15 into negative territory and to the intra-day low of 1131.07.  Through noon, a rebound rally lifted the index up to the 1150 level, where it tested resistance twice and failed.  Through 1:30, the index retraced gains back to 1140.  At 2:00, headlines of an European plan to expand the emergency bailout fund buoyed markets, and the index rallied through the close.  The intra-day high of 1164.19 came at 3:57 and the SPX closed just shy of that level. 
    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 41st straight session and below 1200 for the fourth straight session.  The index closed below its April 2010 highs for the 36th time in the last 37 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 -1.76%) below its 20-day moving average (1183.76) for the fourth straight session.  The index closed (by -3.90%) below its 50-day moving average for the 43rd straight session.  The index closed (by -7.82%) below its 100-day moving average (1261.59) for the 42nd straight session.  The SPX closed -9.27% below its 200-day moving average, closing below that average for the 38th straight session.   All moving averages fell.  The directional momentum indicator is negative for the 41st straight session, and the trend is moderate and stable.  Relative strength rose to 45.72 from 39.72, a neutral range.  Next resistance is at 1174.40; next support is at 1141.28.
    BKX.  On higher volume, the KBW bank index rose +1.85 points, or +5.29%, to end at 36.85, its 38th close below the prior 52-week low of 42.70 from August 25, 2010 and its 35th straight sub-40 close.  Volume rose +21.99% to 131.53 million shares, up from 107.82 million shares Friday and above the 116.33 million share 50-day averageThe BKX closed -14.26% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -36.41% and -33.76% below its April 23, 2010, and February 14, 2011 respective closes.
    Financials were the market’s best performing sector, and large-cap banks outperformed regional banks.  The BKX gapped higher to the 35.60 level, up +1.9%, and unlike the broader market, rallied to 35.85 by 9:55.  Broader negative momentum finally caught up to bank stocks, and through 10:15, the index retraced gains back to 35.30, setting the intra-day low.  Through 11:00, the index rallied to 36.00 and tested resistance there through noon.  Failing to break through, the BKX retraced gains back to 35.40 by 1:30.  The news from Europe at 2:00 lifted banks stocks, and in trading’s final hour, a short squeeze shot the index from 35.60 to 36.90, a +3.5% move, in 45 minutes.  The 36.90 intra-day high came four minutes prior to the market’s end, and the BKX closed just off that level. 
    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 (40.00) crossed below the 100- and 200-day moving averages (44.16 and 48.35, respectively) on April 25th and June 16th.  The 20-day closed (by -2.49 points) below the 50-day for the 136th straight day, but the gap narrowed.  The 50-day moving average closed (by -8.36 points) below the 200-day moving average for the 73rd straight session, and the gap expanded.  The 100-day moving average closed (by -4.20 points) below the 200-day moving average for the 51st straight session, and the gap expanded.  The BKX closed below its 20-, 50-, 100-, and 200-day moving averages for the 5th, 55th, 56th, and 81st consecutive sessions, respectively.  The index closed below 50.0 for the 81st straight session and below 40.00 for the 35th straight session.  The directional movement indicator is negative for the 44th straight session, and the trend is moderate and declining.  Relative strength rose to 46.33 from 38.30, a neutral range.  Next resistance is 37.42; next support at 35.75.
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