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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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  • Europe Offers a Plan, Markets Respond Well 0 comments
    Oct 27, 2011 9:23 AM | about stocks: SNV
    This morning.  The U.S. equity market is in a confirmed uptrend. This morning, equity futures are significantly higher, after Eurozone sovereign debt and bank recapitalization agreements announced overnight. Positive earnings reports and an in-line initial look at 3Q2011 U.S. GDP further strengthened futures. Equity options markets suggest a neutral short-term outlook.  Asian markets closed higher in Japan and China, though gains in Shanghai were more modest than elsewhere. Eurozone equities are up more than 5.0%, with particular strength in the financials group. The U.S. dollar is weaker.  Commodities prices are generally stronger.  U.S. Treasury yields are higher.  U.S. repo rates remain at low levels.  3-month LIBOR remains elevated, near the year’s high.  Euribor-OIS spreads are also at 2011 highs.  After a fair value adjustment of +0.45 points, December SPX equity futures are at 1270.50, up +31.85 points and above first and second resistance levels.  The SPX opens at 1242.00, -8.92% below its April 29 multi-year closing high, +4.68% above its 20-day and +5.20% above its 50-day moving averages.  The SPX is -1.24% below its 1257.64 year-end close.  Next resistance is at 1251.83; next support is at 1226.61.
    Wednesday.  The major indexes initially gapped higher, but traded lower by 11:00, as doubts continued that European leaders could come to reasonable sovereign debt restructuring and bank recapitalization terms. Markets began to strengthen, however, and traded back to small gains at mid-day. After some renewed profit taking. Markets strengthened with greater conviction and rallied through most of the afternoon, before giving back modestly into the close. The NYSE composite posted the best +1.42% gain, followed by the DJI, SPX, and Nasdaq, with gains of +1.39%, +1.05%, and +0.46%, respectively. Volume rose, heavied up, but remained unimpressive at 0.98x the NYSE composite 50-day moving average.  A strong durable goods report supported views, reconfirmed by this morning’s 3Q2011 GDP report, that the U.S. would avoid a double dip recession. Oil and gas, basic materials, and financials led with gains of at least +1.90%. Industrials, technology, and consumer services lagged. 
    Trading desks reported being better to buy through most of the day, but important potential catalysts this week and next prevent aggressive short-selling or positioning.  Some expressed surprise that losses weren’t worse given the headlines. 

    Distribution days number 2 on the SPX and NYSE composite, and 1 on the DJI and Nasdaq, since the uptrend commenced on October 4th.
    In Asia, equity markets closed substantially higher, though volume was lower in Shanghai. The Nikkei gained +2.04% with a +28.4% increase in volume, with the value of equities traded in excess of ¥1 trillion for the 1st time in the past 9 trading days. The Hang Seng and Shanghai composite gained +3.26% and 0.34%, respectively. Volume surged 87.5% in Hong Kong. In Shanghai, volume fell -22.4%. Commentary focused on relief of an apparently sufficient Eurozone deal on its sovereign debt, and signals that Chinese monetary policy would become no more restrictive and could ease in coming months. 
    In Japan, the NKY closed at 8,926.54, compared to 8,748.47 the prior day.  The NKY closed +2.77% above its 20-day moving average.  The NKY opened modestly higher, but traded lower through mid-morning before strengthening through the afternoon session to close at the day’s high. Except for utilities, all market segments closed higher.  Leaders were financials, industrials, and oil and gas, which closed at least +2.67% higher. Telecommunications, consumer services, and utilities were the laggards.
    In China, the Hang Seng Index closed at 19,688.70, up from 19,066.54 at the prior day’s close.  After a few minutes’ hesitation, the index rallied strongly and gained through the day to end just short of the 19,693.2 intraday high. The index closed +9.02% and +4.00% above its respective 20-day and 50-day moving averages.  Most market segments closed higher.  Leaders were consumer goods, technology, and oil and gas, which added at least +4.46%.  Financials added +3.96%.  Laggards were industrials (+2.31%) and  telecommunications and utilities, which closed at least -0.31% lower.
    In Shanghai, the SHCOMP closed at 2,435.62, up from 2,427.48 the prior day and rising for a 4th consecutive day.  The index opened modestly higher, but traded to a mid-morning intraday high of 2,449.70 before losing ground through most of the day’s remainder. The SHCOMP closed +1.82% above its 20-day moving average, but -1.72% below its 50-day moving average.  Market segments were mixed. Utilities, financials, and industrials led with gains of at least +0.28%. Consumer goods, technology, and telecommunications closed lower with losses of at least -0.07%.
    In Europe, equities are substantially higher and near their intraday highs.  Commentary focuses on the Eurozone sovereign debt agreements, announced today with greater than expected detail. The Euro Stoxx 50, DAX, and FTSE are up +5.61%, +3.01%, and +5.09%, respectively.  On the Euro Stoxx 50, the index gapped up +3.0% and has strengthened through the morning. All market segments are higher, led by financials (+10.9%), basic materials (+5.91%), and utilities (+4.58%). Health care, consumer services, and technology are the laggards, but up at least +2.82%.
    Libor, LOIS, Currencies, Treasuries, Commodities:
    • Interbank lending rates continue to reflect substantial stress, centered on the health of Eurozone banks in the current economic environment.   Overnight USD LIBOR is 0.14222%, unchanged from Wednesday, but below the 0.25188% year-end level.  USD 3-month LIBOR rose to 0.42806%, the highest level of the year, up from 0.42472% the prior day and compared to 0.30281% at year-end 2010.
    • The US Libor-OIS (LOIS) spread rose to 34.7 bps, the highest level of the year, from 34.5 bps the prior day and compares to 12.0 bps at the end of 2010.  Euribor-OIS eased to 77.6 bps, also the year’s high, from 78.2 bps the prior day, 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 3.0 bps, unchanged from 3.0 bps Wednesday and 10.0 bps Tuesday, but well off from a recent high of 33 bps on August 2nd.
    • U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.285% and 2.264%, respectively, compared to 0.285% and 2.204% Wednesday.  The yield curve widened to +1.979%, compared to +1.919% 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.
    • The U.S. dollar is weaker against the euro, pound, and yen.  The dollar trades at US$75.610, compared to US$76.246 the prior day, and its US$76.556 50-day, US$75.637 100-day, and US$75.778 200-day averages.  The euro trades at US$1.4033, compared to US$1.3906 Wednesday and US$1.3908 the day prior.  The euro trades below its US$1.3850 50-day and US$1.4076 100-day averages.  In Japan, the dollar trades at ¥75.83, compared to ¥76.18 Wednesday and ¥76.09 the prior day.  The yen trades better than its 50-day moving average ¥76.768.
    • Commodities prices are mostly higher, with higher energy, mixed precious metals, lower aluminum, but higher copper, and higher agriculture prices.
    Volatility, Skew:
    • The VIX ended at 29.886, down -7.32% from 32.22 at the prior close.  The VIX is -15.0% below its 20-day moving average 35.12.
    • The Euro Stoxx 50 volatility index (V2X) is down -17.4% to 31.21, compared to 37.77 the prior day.  The V2X index trades -24.7% below its 20-day moving average of 41.49, -40.7% below the 56.34 30-day high, and +32.4% above the 34.17 30-day low.
    • The Hang Seng volatility index (VHSI) fell -6.91% to 34.06 from 36.59 the prior day.  The VHSI index trades -10.1% below its 20-day moving average of 37.90.
    • CBOE skew ended at 122.65, down -1.76% from 124.85 at the prior day’s close, but still above a neutral (115-120) range.  The index tracks the cost of buying out-of-the-money, long-dated options.  A rise implies that investors are paying more to buy puts, a bearish signal.
    U.S. news and economic reporting.  Today’s scheduled economic reports include the first look at 3Q2011 GDP, inflation, and the latest week’s initial and continuing jobless claims. GDP met survey at +2.5%. Personal consumption grew +2.4%, above +1.9% survey. Initial and continuing jobless claims were +402K and 3645K, compared to 401K and 3700K survey and 403K and 3719K prior. At 10:00, September pending home sales and the Kansas City Fed manufacturing activity report are released. 
    Overseas news: This morning’s communiqué following European leaders’ meeting last evening detailed a €106 billion European bank capital shortfall, including specific shortfalls by country, an agreement on a 50% voluntary haircut to private holders of Greek debt, and a target for a leveraged €1 trillion emergency stabilization fund.  European leaders agreed to release Greece’s next bailout tranche of funding.  In October, Eurozone business confidence fell to 94.8 from 95.0 in September, but ahead of 93.8 estimates.  Yesterday, China announced it will lower corporate tax rates in select industries next year. 
    Company news/ratings changes:
    ·         SNV – reports 3Q11 GAAP and operating EPS of $0.02 and -$0.03, compared to estimates of -$0.03.
    3Q2011 Earnings.  The third quarter’s earnings reports have so far surprised expectations.  Of the 221 S&P500 companies that reported earnings to date, 75% (166 out of 221) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +6.3% (compared to a historical average of +2.0%).  EPS is up +14.7% over the prior year.  Though challenged in the current operating environment, 83% of companies reported increased revenues over the prior year and 62% 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 of the 24 BKX members reporting, 75% beat operating estimates with aggregated results surprising by +14.3% and 63% have beat revenue estimates with aggregated surprising by +4.2%.  EPS is up +21.2% over the prior year, while revenue is up +1.5%.  In the third quarter of 2011, analysts estimate the BKX will earn $1.15 per share, compared to $1.12 and $0.71 in 2Q11 and 3Q10, (a +17% and +84% increase, respectively) In the second quarter, 88% (21 of 24) beat earnings estimates on an operating basis.  Revenues also exceeded expectations, with 79% of BKX members beating estimates. 
    Valuation.  The SPX trades at 12.5x estimated 2011 earnings ($99.33) and 11.1x estimated 2012 earnings ($111.57), compared to 12.4x and 11.0 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 +4.0%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.2% and +31.6%, respectively. 
    Large-cap banks trade at a median 1.20x tangible book value, and 10.7x and 9.7x 2011 and 2012 consensus earnings, respectively, compared to 1.17x tangible book value and 10.4x/9.3x 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 +30.1% and +53.8%, respectively.
    Options.  Options markets are neutral.  Composite options markets are neutral, index options markets are neutral, and equity options markets are neutral.  The composite put/call ratio closed at 1.00, compared to 1.03 the prior day and below its 5- and 10-period moving averages of 1.04 and 1.05, respectively.  The index put/call ratio closed at 1.43, compared to 1.29 the prior day and below the 5- and 10-period moving averages of 1.47 and 1.45, respectively.  The equity put/call ratio closed the day at 0.71, compared to 0.77 the prior day and above its 5- and 10-period moving averages of 0.65 and 0.66, respectively.   
    NYSE Indicators.  Volume rose +9.98% to 1.109 billion shares, from 1.008 billion shares Tuesday, 0.98x the 1.130 billion share 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by 1,839 (compared to 1,991 the prior day), or 4.11:1.  Up volume led down volume by 4.68:1.
    SPX. On higher volume, the SPX rose +12.95 points, or +1.05%, to end at 1242.00.  Volume rose +15.16% to 893.04 million shares, up from 775.47 million shares Tuesday and above the 887.56 million share 50-day moving average. For the 53rd straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1181.60 vs. 1274.25 respectively)The SPX closed above its 200-week moving average (1139.18) for the 15th straight session. 
    From its prior close at 1229.05, the SPX gapped higher at the open to the 1240 level, but momentum was negative.  Through 10:55, the index fell, crossing into negative territory at 10:45 and reaching an intra-day low of 1221.06 at 10:55.  Through 11:45, the index rallied back to break-even and fluctuated at the break-even line through 1:30.  At 1:30, a rally began the took the index back to 1240 by 2:10 and to an intra-day high of 1246.28 at 3:36.  The index retraced into the close to 1240 and closed at the high end of the day’s range.
    Technical indicators are negative but improving.  The market returned to a confirmed uptrend following October 12th’s follow-through confirmation of October 4th’s strong reversal.  The SPX closed below 1300 for the 63rd straight session but above 1200 for the 11th straight session.  The index closed above its April 2010 highs for the sixth time in the previous nine 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 +4.28%) above its 20-day moving average (1191.02) for the 14th time in 15 sessions.  The index closed (by +5.11%) above its 50-day moving average for the 12th straight session.  The index closed (by +0.93%) above its 100-day moving average (1230.96) for the third time in the last four sessions.  The SPX closed -2.53% below its 200-day moving average, closing below that average for the 60th straight session.  The 20- and 50-day moving averages rose.  The directional momentum indicator is positive for the 10th straight session, and the trend is weak and increasing.  Relative strength rose to 58.80 from 56.58, a neutral range.  Next resistance is at 1251.83; next support is at 1226.61.
    BKX.  On higher volume, the KBW bank index rose +0.80 points, or +2.06%, to end at 39.58, recording its 59th close below the prior 52-week low of 42.70 from August 25, 2010 and its 57th close below 40 in the last 58 sessions.  Volume rose +29.71% to 115.78 million shares, up from 89.26 million shares Tuesday and above the 112.03 million share 50-day averageThe BKX closed -7.91% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -31.70% and -28.85% below its April 23, 2010, and February 14, 2011 respective closes.
    Financials outperformed the market, and regionals outperformed large-cap banks.  From its prior close at 38.78, the BKX gapped higher at the open to 39.50 and quickly rose to the 39.61 level.  Through 10:30, the index retraced back to 38.90.  A rally at 10:30 took the index back to 39.25 by 10:40, but an ensuing sell-off retraced the day’s gains back to break-even and set the intra-day low of 38.78 at 10:50.  The BKX rallied through 11:50, reaching 39.25, but the rally was sold back to 38.90 by 1:10.  From 1:10 through 3:35, the index staged a strong rally, ultimately reaching the intra-day high of 39.83 at 3:35.  The index sold off into the close, but still finished at the high end of the day’s range. 
    Technical indicators are negative, but are improving rapidlyBank stocks are leading the market’s direction, which switched to an uptrend after October 13’s  confirmation of October 4th’s strong reversal.  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, but the index has now recorded its 11th close above that level since October 12th.  Moving averages align bearishly, as the shorter duration averages are below the longer duration averages, although all major gaps are narrowing, and some averages are rising.  The 50-day average (37.32) crossed below the 100- and 200-day moving averages (41.45 and 46.72, respectively) on April 25th and June 16th.  The 20-day closed (by +0.06 points) above the 50-day for the first time since March 10th (158 sessions).  The 50-day moving average closed (by -9.41 points) below the 200-day moving average for the 95th straight session, and the gap narrowed.  The 100-day moving average closed (by -5.27 points) below the 200-day moving average for the 73rd straight session, but the gap narrowed.  The BKX closed above its 20-day moving average for the 14th time in the previous 15 sessions and above its 50-day moving average for the 11th time in 12 sessions.  The BKX closed below its 100- and 200-day moving averages for the 78th and 103rd consecutive sessions, respectively.  The index closed below 50.0 for the 103rd straight session and below 40.00 for the 56th time in the last 57 sessions.  The directional movement indicator is positive for the eighth straight session, and the trend is weak and stable.  Relative strength rose to 56.12 from 53.69, a neutral range.  Next resistance is 40.01; next support at 38.97.
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