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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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  • Greece Unwinds, U.S. Futures Substantially Lower, at Morning Lows 0 comments
    Nov 1, 2011 9:20 AM | about stocks: BBT, BBX, MFGLQ
    This morning.  The U.S. equity markets are in a confirmed uptrend.  This morning, equity futures are substantially lower and near their worst levels of the morning.  Europe is the day’s principal focus, after the country’s prime minister called for a national referendum on austerity measures that all thought were settled. MF Global (MF, assets of $41 billion) remains a focus after news reports that some $700 million in customer monies have gone missing. Italian 10-year debt is at fresh record yields. The dollar is substantially stronger against other major currencies.  Otherwise, 3Q2011 earnings reports continue generally better than expected.  Equity options markets suggest a neutral short-term outlook.  Asian markets closed mixed on mixed volume, with Shanghai fractional higher. Eurozone equities gapped lower and currently trade near intraday lows, off more than -5.0%. Commodities prices are corresponding lower.  U.S. Treasury yields are lower.  U.S. repo rates remain at low levels.  Overnight and 3-month LIBOR remain elevated, near the year’s highs.  Euribor-OIS spreads are near 2011 highs.  After a fair value adjustment of +0.10 points, December SPX equity futures are at 1209.60, down -39.80 points.  The SPX opens at 1253.30, -8.09% below its April 29 multi-year closing high, +3.36% above its 20-day and +5.42% above its 50-day moving averages.  The SPX is +-0.35% below its 1257.64 year-end close.  Next resistance is at 1274.45; next support is at 1242.65.
    Monday.  Principally on adverse European sovereign concerns, equity markets ended substantially lower. The NYSE composite lost -3.06%, followed by losses of -2.47%, -2.26%, and -1.93%, respectively, on the SPX, DJI, and Nasdaq. The pullback was the first since October 25th, and the worst since October 3rd. At the open, the major indexes traded more than -1.0% lower, but volumes were light, and equities traded within a narrow range until the final hour. News of the Greek referendum spurred selling, which accelerated into the close. Volatility rose sharply into the close. Market breadth was negative, and up volume lagged down volume.  All market segments were lower. Utilities, consumer goods, and consumer services were the leaders, but closed at least -1.55%. Financials, oil and gas, and basic materials lagged with a loss of at least -3.75%.
    Trading desk commentary focused on the lack of demand through most of the day, though selling pressures picked up in the final hour. 
    Volume rose on all the major exchanges, adding a distribution day. Distribution days number 3 on the SPX and NYSE composite, and 2 on the DJI and Nasdaq, since the uptrend commenced on October 4th.
    In Asia, equity markets closed mixed on mixed volume.  The Nikkei and Hang Seng lost -1.70% and -2.49%, respectively.  Volume fell -22.4% in Japan and -0.57% in Hong Kong. In Shanghai, the Shanghai composite rose +0.07%. Volume rose +4.767%. Commentary focused on a drop in Chinese October PMI (to 50.4, below survey 51.8 and prior 51.2) and ongoing Eurozone sovereign debt concerns.
    In Japan, the NKY closed at 8,835.52, down from 8,988.39 at the prior close.  The NKY closed +1.17% above its 20-day moving average.  The NKY gapped lower to about 8,880, but rallied back to find resistance at 8,946, the intraday high. The index trended lower through the rest of the day. Most market segments ended lower. Utilities rose +0.85%. Other leaders were telecommunications and consumer services, which closed off at least -0.10%. Financials shed -0.89%. Laggards were consumer goods, basic materials, and technology, which closed off at least -2.32%.
    In China, the Hang Seng Index closed at 19,369.96, down from 19,864.87 at the prior close.  The index gapped lower to 19,460, but rallied through mid-morning back to a 19,699.0 intraday high. Finding stiff resistance at that level, the index trended lower through the close, ending +5.55% and +2.45% above its respective 20-day and 50-day moving averages.  Market segment leaders were utilities, telecommunications, and consumer goods, which closed up +0.13%. Laggards were basic materials, technology, and financials, which closed at least -2.88% lower.
    In Shanghai, the SHCOMP closed at 2,470.02, up slightly from 2,468.25 at the prior close.  The index gapped lower to open at 2,450, but rallied and reversed strongly back to 2,490 by mid-morning. Finding resistance, selling ensured and the index traded back to below 2,460 in mid-afternoon, the strengthened mildly to close with a fractional gain. The SHCOMP closed +3.02% above its 20-day moving average, but -0.05% below its 50-day moving average.  Market segments were mostly higher. Leaders were technology, health care, and consumer goods, which rose at least +0.52%. Financials added +0.09%. Laggards were industrials, which added +0.05%, and consumer services and basic materials, which closed lower.
    In Europe, equities gapped lower and are trading near their intraday lows. Commentary focuses on the Greek PM’s call for a national referendum, scheduled for January, on the country’s austerity plans. The Euro Stoxx 50, FTSE, and DAX are down -4.32%, -2.87%, and -4.81%, respectively, extending yesterday’s losses.  On the Euro Stoxx 50, the index traded to an intraday low of 2,276.25, and currently trades at 2,282.00. All market segments are lower. Leaders are technology, consumer services, and oil and gas, which are off at least -1.96%. Basic materials, industrials, and financials lag with losses of at least -4.13%.
    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 Monday, but below the 0.25188% year-end level.  USD 3-month LIBOR rose to 0.42944%, the highest level of the year, but unchanged from 0.42944% the prior day and compared to 0.30281% at year-end 2010.
    • The US Libor-OIS (LOIS) spread rose to 34.9 bps, the highest level of the year, from 34.7 bps the prior day and compares to 12.0 bps at the end of 2010.  Euribor-OIS rose to 85..0 bps, the year’s highest level, from 81.0 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 4.0 bps, unchanged from 4.0 bps Monday, and well off from a recent high of 33 bps on August 2nd.
    • U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.246% and 2.047%, respectively, compared to 0.238% and 2.113% Monday.  The yield curve narrowed to +1.801%, compared to +1.875% the prior day.  In the past year, the 2- and 10-year spread 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 stronger against the euro, pound, and yen.  The dollar trades at US$77.222, compared to US$76.166 the prior day, and above its US$76.671 50-day, US$75.678 100-day, and US$75.745 200-day averages.  The euro trades at US$1.3708, compared to US$1.3858 Monday and US$1.4147 the day prior.  The euro trades worse than its US$1.3823 50-day and US$1.4063 100-day averages.  In Japan, the dollar trades at ¥78.18, compared to ¥78.17 Monday and ¥75.82 the prior day.  The yen trades worse than its 50-day moving average ¥76.814.
    • Commodities prices are lower, with lower, energy,  metals, and aluminum, copper, and agriculture prices.
    Volatility, Skew:
    • The VIX ended at 29.96, up 22.1% from 24.53 at the prior close.  The VIX is -6.95% below its 20-day moving average 32.20.
    • The Euro Stoxx 50 volatility index (V2X) is up +16.9% to 41.01 from 35.12 the prior day.  The V2X index trades +5.42% above its 38.91 20-day moving average, -22.2% below the 52.62 30-day high, and +44.7% above the 28.29 30-day low.
    • The Hang Seng volatility index (VHSI) rose +0.66% to 32.10 from 31.89 the prior day.  The VHSI index trades -12.4% below its 20-day moving average of 36.64.
    • CBOE skew trades at 121.18, unchanged from 121.18 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 September construction spending, and October ISM, at 10:00. The FOMC hosts a two-day meeting, which concludes Wednesday afternoon with Bernanke’s press conference.  Otherwise, the week’s focus will be on the Wednesday’s ADP employment report for October, Thursday’s latest weekly initial and continuing jobs claims, and Friday’s U.S. non-farm payrolls report for October.
    Overseas news: Yesterday, Greek Prime Minister Papandreou announced a Greek public referendum will be held on the Eurozone’s most recent bailout loan terms in the coming weeks, surprising EU officials and markets.  In October, the U.K. purchasing managers index (PMI) missed expectations at 47.4, versus 50.0 consensus.  In October, the Chinese government’s manufacturing PMI fell to 50.4, below consensus of 51.1. 
    Company news/ratings changes:
    ·         BBT – buys BBX for a $301 million premium to net asset value, totaling approximately $4.20 per share
    ·         MF – news reports suggest that up to $750 million in client money went missing from the firm in the days preceding its bankruptcy.
    3Q2011 Earnings.  The third quarter’s earnings reports have so far surprised expectations.  Of the 304 S&P500 companies that reported earnings to date, 74% (224 out of 304) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +5.8% (versus a historical average of +2%).  EPS is up +19.0% over the prior year.  Though challenged in the current operating environment, 82% of companies reported increased revenues over the prior year and 59% 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, the BKX earned $1.24 per share, beating analysts’ estimate of $1.15 per share, and compared to $1.12 and $0.71 in 2Q11 and 3Q10, (an +11% and +48% 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 12.6x estimated 2011 earnings ($99.29) and 11.2x estimated 2012 earnings ($111.57), compared to 12.9x and 11.5 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 +4.0%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.1% and +31.6%, respectively. 
    Large-cap banks trade at a median 1.24x tangible book value, and 10.8x and 9.5x 2011 and 2012 consensus earnings, respectively, compared to 1.27x tangible book value and 11.8x/9.7x 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 1.26, compared to 0.98 the prior day and above its 5- and 10-period moving averages of 1.03 and 1.05, respectively.  The index put/call ratio closed at 1.80, compared to 1.28 the prior day and above the 5- and 10-period moving averages of 1.47 and 1.49, respectively.  The equity put/call ratio closed the day at 0.75, compared to 0.55 the prior day and above its 5- and 10-period moving averages of 0.66 and 0.64, respectively.   
    NYSE Indicators.  Volume rose +13.3% to 1.143 billion shares, from 1.009 billion shares Friday, 1.02x the 1.120 billion share 50-day moving average.  Market breadth was negative, and up volume outpaced down volume.  Advancing stocks lagged decliners by -1,908 (compared to -57 the prior day), or 0.23:1.  Up volume lagged down volume by 0.11:1.
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