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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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Listening to Markets
  • Capital Goods Improve, Support U.S. Equity Futures 0 comments
    Sep 28, 2011 9:21 AM | about stocks: STT, BK, STI, ZION, USB, BAC, TCB, PVTB, CMA, BXS, FHN, HCBK
    This morning.  Despite 3 consecutive days’ gains, U.S. equity markets remain in correction.  Equity options markets suggest a neutral to bearish short-term outlook.  Asian markets closed mixed, with Japan providing the better result. Eurozone equities are again rallying strongly, with particular strength in financials.  The U.S. dollar is slightly weaker.  Commodities markets are mixed.  U.S. Treasury prices are slightly lower.  LIBOR markets suggest continued interbank lending credit concerns, though Euribor-OIS spreads are slightly narrower today.  After a fair value adjustment of -0.02 points, December SPX equity futures are at 1173.50, up +4.02 points.  The SPX opens at 1175.38, -13.8% below its  April 29 multi-year closing high, -0.56% below its 20-day and -2.67% below its 50-day moving averages.  The SPX is -6.54% below its 1257.64 year-end close.  Next resistance is at 1193.05; next support is at 1160.51.
    Tuesday.  U.S. equity markets opened strong and trended higher through most of the day, but reversed and lost more than half the day’s gains in the final hour of the trade. From its prior close at 1163.32, the SPX rose to an intraday high of 1195.86 just after 2:00, retreated to test support at 1170 minutes before the close, and rallied to end at 1175.38. The NYSE composite ended with the day’s best +1.47% gain, followed by the DJI, Nasdaq, and SPX, which closed with respective gains of +1.33%, +1.20%, and +1.07%. All market segments closed at least +0.30% higher.  Basic materials, industrials, and oil and gas were the segment leaders, with gains of at least +1.51%. Financials, consumer services, and utilities were the laggards, but ended at least +0.30% higher. Volatility fell -3.36%, as the VIX ended at 37.71, down from 39.02 at the prior day’s close.
    In Asia, on mixed volume, equity markets closed mixed, slightly higher in Japan, but lower in China. In Japan, traders cited progress in Europe’s sovereign debt negotiations, as Greece appears poised to receive its next aid tranche. In China, traders cited doubts regarding the sufficiency and efficacy of the Eurozone’s progress. In Tokyo and Hong Kong, neither equity market traded with much conviction. In Shanghai, the trend was distinctly lower through the day, with a greater focus on a prospective slowing of the Chinese economy. One report cited the need for property developers to cut prices on condominiums in order to reduce growing inventories.
    In Japan, the Nikkei rose a scant +0.07% and closed at 8,615.65, compared to 8,609.95 at the prior day’s close. Volume was unchanged. The NKY initially moved higher, but found resistance at 8,660, and trended back to and found support at 8,600 just before noon. Another rally failed in the afternoon, and the NKY struggled to hold its gains into the close. Market segments were mixed. Best segments were financials, telecommunications, and consumer goods, which closed up at least +1.14%. Health care, technology, and consumer service were the laggards, down at least -0.89%. The NKY is down -15.8% in 2010 and is -5.64% below its 50-day moving average.
    In China, the Hang Seng and Shanghai composite closed at 18,011.06 and 2,392.06, respectively, down -0.66% and -0.95%.  In Hong Kong, volume fell -5.64%.  The HSI move lower at the open, but rallied by mid-morning to an intraday high of 18,101.30. Finding strong resistance, the index moved lower to retest support at 17,850 in early afternoon, then trended higher into the close. Market segments closed mixed, led by technology, oil and gas, and consumer services, which rose at least +0.99%. Industrials, financials, and utilities closed at least -1.25% lower. The HSI is off -21.8% in 2011 and is -11.1% below its 50-day moving average.  In Shanghai, volume rose +0.18%.  The SHCOMP gapped modestly higher, but met resistance at 2,430 and trended back to breakeven by early afternoon. Losses accelerated through the afternoon, to a 2,383.40 intraday low a half-hour before the close. Most segments closed lower. Oil and gas added +0.30%. Telecommunications and financials were the other leaders, by lost at least -0.48%. Utilities, consumer goods, and consumer services were the segment laggards, shedding at least -1.55%. The SHCOMP closed -14.8% below its 2010 close and -7.16% below its 50-day moving average.
    In Europe, equities markets are mixed and off their best levels of the day. The Euro Stoxx 50 and DAX are up +0.04% and +0.35%, respectively, while the FTSE is -0.35%. On the EuroStoxx50, most market segments are higher, led by technology, health care, and utilities, which are up at least +0.72%.  Oil and gas, consumer services, and financials are the laggards.
    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%, compared to 0.14500% Tuesday, but down from 0.25188% at year-end.  USD 3-month LIBOR rose to 0.36856%, the highest level of the year, up from 0.36522% the prior day and compared to 0.30281% at year-end 2010.
    ·         The US Libor-OIS (LOIS) spread rose to 28.1 bps, from 27.8 bps the prior day and 12.0 bps at the end of 2010.  Euribor-OIS fell to 80.3 bps from 80.5 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 unchanged at 8 bps, but down from 16 bps Monday, and 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$77.40, compared to US$77.506 the prior day, and above its US$75.211 50-day, US$75.112 100-day, and US$76.026 200-day averages.  The euro trades at US$1.3667, compared to US$1.3585 Tuesday and US$1.3533 the prior day.  The euro trades below its US$1.4125 50-day and US$1.4213 100-day averages.  In Japan, the dollar trades at ¥76.38, compared to ¥76.81 Tuesday and ¥76.36 the prior day.  The yen trades better than its 50-day moving average ¥77.084.
    ·         U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.235% and 1.975%, respectively, compared to 0.235% and 1.971% Tuesday.  The yield curve widened to 1.740% from +1.736% 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 lower petroleum, mixed precious metals, higher aluminum and copper, and mixed agricultural prices.
    U.S. news and economic reporting.   MBA mortgage applications rose +9.3% in the latest week. Other U.S. economic reports focus on August durables goods, released at 8:30. Thursday, the focus turns to initial jobless claims, and the 3rd revision of 2Q2011 GDP, personal consumption, and core PCE.
    Overseas news: Today, officials from the European Union, European Central Bank, and IMF will release a collective statement on Greece.  Today, news reports indicate Greece’s private debt holder swap plan has reached 90% participation.  Today, German Finance Minister Schauble described as “stupid” the U.S.-supported plan to lever up the European bailout fund’s size.  In September, Italian business confidence fell much more than expected, to 94.5 compared to 98.6 in August and 98.4 estimates, the lowest level since the fall of 2008.  Today, Germany’s 5-year debt auction came in undersubscribed with bids for €5.1 billion compared with €6.0 billion offered.  Today, European Commission President Barroso reiterated support for a financial transaction tax. 
    Company news/ratings changes:
    ·         CMA – raised to neutral at Wells Fargo,
     
    2Q2011 Earnings.  The second quarter’s earnings results exceeded revenue and earnings expectations.  Of the 493 S&P500 companies that reported earnings to date, 75% (373 out of 493) 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 +16.6% 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 11.8x estimated 2011 earnings ($99.30) and 10.6x estimated 2012 earnings ($111.34), compared to 11.7x and 10.4 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 1.13x tangible book value, and 10.4x and 8.2x 2011 and 2012 consensus earnings, respectively, compared to 1.14x tangible book value and 10.5x/8.1x 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 +37.9% and +65.2%, respectively.
    Options.  Options markets are neutral to bearish.  Composite options markets are neutral, index options markets are neutral, and equity options markets are bearish.  The composite put/call ratio closed at 1.12, compared to 1.03 yesterday and in between its 5- and 10-period moving averages of 1.16 and 1.10, respectively.  The index put/call ratio closed at 1.61, compared to 1.51 yesterday and in between the 5- and 10-period moving averages of 1.59 and 1.48, respectively.  The equity put/call ratio closed the day at 0.63, compared to 0.64 yesterday and below its 5- and 10-period moving averages of 0.72 and 0.68, respectively.
    Tuesday’s equity markets. On mixed volume, equity markets gained strongly in early trading, but reversed and gave up more than half their gains by the close.  Equity markets managed to hang despite a mid-afternoon headline that some euro-area countries were demanding private creditors take a bigger write downs on their Greek bond holdings.  The NYSE, DJI, Nasdaq, and SPX all finished higher, up +1.47%, +1.33%, +1.20%, and +1.07.  The morning began with futures indicating a much higher open on optimism that euro-area leaders would cobble together legislation that would avoid a Greek default.  Markets opened higher and continued higher through the morning and early afternoon.  The SPX rose as much as +2.80% but found resistance at 1195 and reversing just after 2:00. Over the next 90 minutes, the sell-off accelerated, until markets found support at 1170 on the SPX about 10 minutes before the close. Markets bounced slightly into the close, ending well off their highs.
     
    Economic news from the US had little impact. The S&P Case Shiller Home Price Index improved slightly in July as some surmised that home foreclosures may have slowed as various state and federal agencies look into their practices. Consumer confidence is stagnant at 45.5 versus the previous reading of 45.2. The Richmond Federal Reserve Manufacturing Index was better at -6 versus expectations of -11.
    Despite the volatility, trading desks reported a quiet day, with most activity driven by short-term money.  Some suspect that most of the activity was short covering, as markets headed higher.  Larger institutions seemed to be better for sale and didn’t appear after the Greek headline.  Traders report that shorts are suffering a bit as this market lifts on the “hope” trade. Buyer enthusiasm did not seem as intense as Friday or Monday, especially at resistance levels.  The overriding bias remains to de-risk, but some investors see good valuations.  The Bloomberg NYSE new net highs were -3 versus the previous reading of -213. The relative strength indicator increased again to 45.31 from 41.83 and is in the lower end of a neutral range.
    All market segments were positive. Basic materials, industrials and oil and gas were the leaders, while financials, consumer services and utilities were the laggards.
    At one point, Financials led markets, but gave up most of their gains late in the day.  The KRX and XLF both finished up +1.66% and +0.49%, respectively, while the BKX closed off -0.05%. Financial stocks were most affected by a Financial Times report that euro-countries were demanding that private creditors take bigger write-downs on their Greek bond holdings.  The BKX, which had been up a little more than 3% through most of the day, ended down after the headline.  The BKX finished the day with 9 names higher and 15 lower.  STT, BK, and STI were the leaders, while ZION, USB, and BAC were lower, off at least -1.14%.  The KRX held with 43 names higher, 5 lower, and 2 unchanged.  Leaders were TCB, PVTB, and BXS, up at least +4.22%. Laggards were FHN, HCBK, and EWBC. Trading desks we spoke with mentioned some short covering early in the day in banks and strength in the trust banks. Credit cards, which have outperformed in the past few sessions, gave up some of their gains Tuesday.  Traders mentioned that a “swap” trade in financials seemed to be in place as investors sold names that have outperformed for names considered undervalued early in the day.  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 -36.5% below its April 2010 high and -55.4% below its best level in September 2008.
    SPX. On lower volume, the SPX rose +12.43 points, or +1.07%, to end at 1175.38.  Volume fell -1.94% to 900.33 million shares, down from 918.12 million shares Monday and below the 980.74 million share 50-day moving average.  For the 31st straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1207.58 vs. 1281.49 respectively)The SPX closed below its 200-week moving average (1144.77) for the second straight session.
    The SPX gapped higher at the open to 1180 and rose to 1185 by 9:45.  The index gradually climbed to 1195 through the early afternoon, with small sell-offs outpaced by modestly higher highs.  At 2:10, the index set its intra-day high of 1195.86 and began to retrace gains.  By 3:00, the index stood at 1190 when a news article suggested some Eurozone countries sought to renegotiate private Greek bond holders’ debt swap terms.  The SPX’s fall accelerated.  Through 3:55, the index gave back 20 points and reached the intra-day low of 1169.88.  A 5 point rebound into the bell closed the index just above 1175.  After spending almost the entire trading session above 1185, the index closed 10 points below that level and near the day’s lows.   
    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 42nd straight session and below 1200 for the fifth straight session.  The index closed below its April 2010 highs for the 37th time in the last 38 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 -0.56%) below its 20-day moving average (1182.02) for the fifth straight session.  The index closed (by -2.67%) below its 50-day moving average for the 44th straight session.  The index closed (by -6.72%) below its 100-day moving average (1259.99) for the 43rd straight session.  The SPX closed -8.28% below its 200-day moving average, closing below that average for the 39th straight session.  All moving averages fell.  The directional momentum indicator is negative for the 42nd straight session, and the trend is moderate and stable.  Relative strength rose to 48.31 from 45.72, a neutral range.  Next resistance is at 1193.05; next support is at 1160.51.
    BKX.  On lower volume, the KBW bank index fell -0.02 points, or -0.05%, to end at 36.83, its 39th close below the prior 52-week low of 42.70 from August 25, 2010 and its 36th straight sub-40 close.  Volume fell -19.98% to 105.26 million shares, down from 131.53 million shares Monday, and below the 116.61 million share 50-day averageThe BKX closed -14.31% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -36.45% and -33.79% below its April 23, 2010, and February 14, 2011 respective closes.
    Financials underperformed the market, and regional banks’ gains outperformed large-cap banks’ losses.  The BKX gapped higher to the 37.80 level.  By 9:40, the index set its intra-day high of 38.08.  Unable to break through 38.00, the index retraced to 37.80 by 10:15, and further to 37.60 by 11:45, still up +2.0% on the day.  Through 3:00, the index traded between 37.60 and 37.80 until financials sold off aggressively with news of European division over Greece’s on-going debt swap.  By 3:25, the index fell -0.75 points and turned negative on the day.  Through 3:55, the index continued falling at set the intra-day low of 36.53.  A closing bell recovery gave the index a modest loss on the day. 
    Technical indicators are negativeBank stocks are leading the market’s direction, currently in a downtrend.  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 (39.82) crossed below the 100- and 200-day moving averages (44.02 and 48.29, respectively) on April 25th and June 16th.  The 20-day closed (by -2.47 points) below the 50-day for the 137th straight day, but the gap narrowed.  The 50-day moving average closed (by -8.47 points) below the 200-day moving average for the 74th straight session, and the gap expanded.  The 100-day moving average closed (by -4.27 points) below the 200-day moving average for the 52nd straight session, and the gap expanded.  The BKX closed below its 20-, 50-, 100-, and 200-day moving averages for the 6th, 56th, 57th, and 82nd consecutive sessions, respectively.  The index closed below 50.0 for the 82nd straight session and below 40.00 for the 36th straight session.  The directional movement indicator is negative for the 45th straight session, and the trend is moderate and declining.  Relative strength fell to 46.26 from 46.33, a neutral range.  Next resistance is 37.76; next support at 36.21.
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