This morning. The U.S. equity market uptrend remains under pressure. This morning, equity futures are moderately higher and strengthening. Commentary focuses on European sovereign debt, stronger than expected rise in U.S. consumer credit, and generally supportive 3Q2011 earnings reports. The dollar is mixed. Equity options markets suggest a neutral short-term outlook. Asian markets closed mixed to modestly lower on mixed volume. Eurozone equities are strong, seemingly more convinced that Greece and now Italy will be contained by a combination of Eurozone and IMF actions. Commodities prices are mixed. U.S. Treasury yields are also mixed. 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 -0.02 points, December SPX equity futures are at 1267.00, up +9.48 points. The SPX opens at 1261.12, -7.52% below its April 29 multi-year 1363.61 closing high, +2.11% above its 20-day and +5.31% above its 50-day moving averages. The SPX is +0.28% above its 1257.64 year-end close. Next resistance is at 1268.30; next support is at 1247.35.
Monday. Volumes were low and down from Friday’s low volumes, but equities reversed large morning losses and ended with moderate gains. Indexes closed near their intraday highs. Greece-related concerns continued to subside. Italian sovereign debt yields remain elevated, above 6.60%. The DJI rose +0.71%, followed by the SPX, NYSE composite, and Nasdaq rose +0.63%, +0.51%, and +0.34%, respectively. Futures indicated a lower open, but the SPX briefly traded higher in early trading, then reversed and sold down to 1240.75 in early afternoon. Equities found support and rallied through the afternoon to end near their intraday highs. Volatility fell. All market segments closed at least +0.20% higher, led by health care, telecommunications, and oil and gas, with ended at least +0.75% higher. Consumer goods, financials, and industrials were the laggards.
Several factors may explain yesterday’s reversal. The rally seemed timed to an ECB statement that the Eurozone crisis would be resolved within 1-2 years; reports of a Eurozone financial ministers’ statement that the EFSF would be leveraged and functioning by the end of November; progress in Greece in forming a new government; supportive statements that the IMF is prepared to make credit lines available to Eurozone peripherals; and a mixed U.S. Fed senior loan officer.
Trading desk commentary focused Eurozone developments and noted the ongoing market nervousness, evident in the initial selloff. Buyers remain unaggressive, though short sellers are as well. Focus is primarily macro.
In Distribution days number 4 on the SPX and NYSE composite, and 3 on the DJI and Nasdaq, since the uptrend commenced on October 4th.
equity markets closed mixed on mixed volume. In Japan, the Nikkei fell -1.27%. Volume rose +36.0%. The Hang Seng was unchanged, while the Shanghai composite fell -0.24%. Volume fell -9.88% in Hong Kong and rose +0.13% in Shanghai. In Japan, commentary focused on Europe and fell on news that Olympus Corp lied in its financial reporting. In China, commentary focused on European sovereign debt concerns. Markets will focus on Wednesday’s Chinese October CPI report. Survey expects 5.5%. A better report will support views of an economic soft landing in China.
Distribution days number 4 on the SPX and NYSE composite, and 3 on the DJI and Nasdaq, since the uptrend commenced on October 4th.
In Japan, the NKY closed at 8,655.51, down from 8,767.09 at the prior close. The NKY closed -1.27% below its 20-day moving average and down -15.4% for the year. The NKY opened at 8,744 and generally trended lower through the day, with greater weakness in the afternoon session. The 8,644.00 intraday low came just before the close. All market segments closed at least -0.02% lower. Consumer services, utilities, and oil and gas were the leaders. Technology, health care, and financials lagged with losses of -1.64%.
In China, the Hang Seng Index closed at 19,678.47, up from 19,677.89 at the prior close. The index gapped higher to open at 19,848.50 and traded in the morning session to an intraday high of 19,914.90, but weakened, especially through the afternoon to end with a negligible gain. The index ended +3.78% and +4.12% above its respective 20-day and 50-day moving averages. Market segments were mixed. Leaders were oil and gas, telecommunications, and utilities, with gains of +0.54%. Consumer services, basic materials, and technology lagged with losses of at least -0.58%.
In Shanghai, SHCOMP closed at 2,503.84, down from 2,509.80 at the prior close. The index opened at 2,514.26, and traded to an intraday high of 2,524.82, where resistance was retested twice in the morning session. The index weakened through the afternoon, to an intraday low of 2,500.02 minutes before the close. The SHCOMP closed +3.05% and +1.66% above its respective 20-day and 50-day moving averages. Most market segments closed lower. Oil and gas and utilities closed higher with gains of +0.96%. Financials lost -0.07%. Health care, consumer services, and technology lagged with losses of at least -1.18%.
In Europe, equities opened higher and have gained strength through the morning session. Focus remains on the ongoing Eurozone sovereign debt drama. Berlusconi faces a parliamentary vote today and a likely confidence vote Thursday. Earnings reports have generally surprised positively and are helping markets today. The Euro Stoxx 50 and FTSE are up +2.15%, +1.59%, and +1.92%, respectively. On the Euro Stoxx 50, from the prior day’s 2,275.92 close, the index has gained to 2,325.25, and is trading at its intraday high at mid-day. All market segments are at least +0.36% higher. Leaders are financials, oil and gas, and basic materials, with gains of at least +2.55%. Telecommunications, health care, and utilities are the laggards.
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 0.14111%, unchanged from 0.14111% the prior day and below the 0.25188% year-end level. USD 3-month LIBOR rose to 0.44417%, the highest of the year, up from 0.44139% the prior day and compared to 0.30281% at year-end 2010.
- The US Libor-OIS (LOIS) spread rose to 35.9 bps, up from 35.4 bps the prior day and compares to 12.0 bps at the end of 2010. Euribor-OIS eased to 85.6 bps from 86.6 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 mixed, with 2- and 10-year maturities yielding 0.238% and 2.027%, respectively, compared to 0.234% and 2.037% Monday. The yield curve narrowed to +1.789%, compared to +1.803% 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 mixed, slightly stronger against the euro and pound, but weaker compared to the yen. The dollar trades at US$76.986, compared to US$76.962 the prior day, and above its US$76.968 50-day, US$75.765 100-day, and US$75.725 200-day averages. The euro trades at US$1.3766, compared to US$1.3776 Monday and US$1.3792 the day prior. The euro trades slightly better than its US$1.3756 50-day, but worse than its US$1.4038 100-day averages. In Japan, the dollar trades at ¥78.02, compared to ¥78.05 Monday and ¥78.24 the prior day. The yen trades worse than its 50-day moving average ¥76.933.
- Commodities prices are mostly higher, with higher energy, lower precious metals, lower aluminum and copper, and higher agriculture prices.
- The VIX ended at 29.85, down -1.03% from 30.16 at the prior close. The VIX is -3.38% below its 20-day moving average 31.05.
- The Euro Stoxx 50 volatility index (V2X) is down -5.83% to 39.76 from 42.22 the prior day. The V2X index trades +3.26% above its 38.49 20-day moving average, -24.5% below the 52.62 30-day high, and +40.5% above the 28.29 30-day low.
- The Hang Seng volatility index (VHSI) fell -2.51% to 35.35 from 36.26 the prior day. The VHSI index trades +0.51% above its 35.17 20-day moving average.
- CBOE skew rose +1.11% to 124.96 from 123.56 at the prior day’s close, and 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. Scheduled economic reports include September consumer credit, October NFIB small business optimism, November IBD/TIPP economic optimism, and September JOLTS job openings. On strong auto sales, consumer credit rose $7.386 billion, compared to survey +$5.150 billion. NFIB small business optimism was 90.2, compared to 90.0 survey, but improved from 88.9 the prior month.
Overseas news: Today, the Italian parliament votes on a proposed austerity budget, viewed as a potential referendum on Prime Minister Berlusconi. Today, Greece is expected to name an interim prime minister. Deposits at the European Central Bank hit a high for the year for the third straight day. Today, China trimmed the yield on its 1-year bill offering, the latest signal that the government is gradually easing monetary policy.
Company news/ratings changes:
· Société Générale – missed consensus earnings estimates and eliminates their dividend
· Intesa Sanpaolo – reported 3Q11 net income of 511 million, beating analysts’ estimates of 317 million
· MS – 3rd quarter 10Q filing discloses mortgage-related lawsuit over $6 billion worth of mortgage-backed securities.
· CMA, FITB, TCB, CYN – initated at buy at UBS; price targets of $33, $15, $15, and $54, respectively
· HBAN, ZION – initiated at neutral at UBS; price targets of $5.50 and $18.50, respectively
· BLK – initiated at buy at Morgan Stanley; price target of $192
3Q2011 Earnings. The third quarter’s earnings reports surprised expectations. Of the 411 S&P500 companies that reported earnings to date, 73% (298 out of 411) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +4.7% (versus a historical average of +2%). EPS is up +16.8% over the prior year. Though challenged in the current operating environment, 80% of companies reported increased revenues over the prior year and 57% 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 12.7x estimated 2011 earnings ($99.10) and 11.3x estimated 2012 earnings ($111.57), compared to 12.6x and 11.2 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 +4.7%, and +4.0%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.9% and +31.6%, respectively.
Large-cap banks trade at a median 1.21x tangible book value, and 10.9x and 9.8x 2011 and 2012 consensus earnings, respectively, compared to 1.19x tangible book value and 10.8x/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 +29.0% 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 0.97, compared to 1.14 the prior day and below its 5- and 10-period moving averages of 1.14 and 1.09, respectively. The index put/call ratio closed at 1.40, compared to 1.51 the prior day and below the 5- and 10-period moving averages of 1.56 and 1.52, respectively. The equity put/call ratio closed the day at 0.66, compared to 0.81 the prior day and below its 5- and 10-period moving averages of 0.72 and 0.69, respectively.
NYSE Indicators. Volume fell -9.14% to 782.75 million shares, from 861.48 million shares Friday, 0.71x the 1.101 billion share 50-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +306 (compared to -636 the prior day), or 1.23:1. Up volume led down volume by 1.69:1.
SPX. On the lowest volume since July 25th, the SPX rose +7.89 points, or +0.63%, to end at 1261.12. Volume fell -7.79% to 599.70 million shares, down from 650.36 million shares Friday and below the 857.88 million share 50-day moving average. For the 60th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1197.53 vs. 1273.05 respectively). The SPX closed above its 200-week moving average (1137.90) for the 22nd straight session.
From its prior close at 1253.23, the SPX opened flat and rallied to the 1259 level by 9:55. Through 12:30, the index sold off, crossing into negative territory at 10:20, reaching the 1245 level at 11:30, and setting the intra-day low of 1240.75 at 12:30. Momentum reversed and the index rallied through the close. The SPX retook its break-even line at 2:15 and set the intra-day high of 1261.70 at 3:52.
Technical indicators are turning neutral. The market returned to a confirmed uptrend following October 12th’s follow-through confirmation of October 4th’s strong reversal, though last week’s declines placed that uptrend under pressure. The SPX closed below 1300 for the 71st straight session but above 1200 for the 19th straight session. The index closed above its April 2010 highs for the 10th time in the previous 11 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 +2.11%) above its 20-day moving average (1235.03) for the 22nd time in 23 sessions. The index closed (by +5.31%) above its 50-day moving average for the 20th straight session. The index closed (by +2.62%) above its 100-day moving average (1228.90) for the eighth time in nine sessions. The SPX closed -0.94% below its 200-day moving average, closing below that average for the sixth straight session. The 20- and 50-day moving averages rose. The directional momentum indicator is positive for the third straight session, and the trend is weak and stable. Relative strength rose to 57.30 from 55.98, a neutral range. Next resistance is at 1268.30; next support is at 1247.35.
BKX. On lower volume, the KBW bank index rose +0.38 points, of +0.96%, to end at 39.88, recording its 67th close below the prior 52-week low of 42.70 from August 25, 2010 and below the 40-level for the fourth time in five sessions. Volume fell -17.25% to 63.40 million shares, down from 76.61 million shares Friday and below the 106.61 million share 50-day average. The BKX closed -7.21% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -31.18% and -28.31% below its April 23, 2010, and February 14, 2011 respective closes.
Financials underperformed the market, and large-cap banks underperformed regional banks. From its prior close at 39.50, the BKX opened flat and quickly rallied to the 39.80 level by 9:40. The index maintained its gains through 10:15, but eventually followed the market lower. The index turned negative at 10:40 and set the intra-day low of 39.16 at 12:25. The BKX reversed momentum through the close, turning positive at 2:00 and reaching an intra-day high of 39.89 at 3:52.
Technical indicators are negative, but are improving. Bank stocks are leading the market’s direction, which switched to an uptrend after October 13’s confirmation of October 4th’s strong reversal. However, last week’s sharp losses in the markets, and in banks particularly, have placed that uptrend under pressure. The BKX has now recorded its 19th close above the 50-day moving average since October 12th, a level which provided meaningful resistance since February 22nd. Moving averages align bearishly, as most shorter duration averages are below the longer duration averages, although most major gaps are narrowing and some averages are rising. The 50-day average (37.82) crossed below the 100- and 200-day moving averages (40.91 and 46.20, respectively) on April 25th and June 16th. The 20-day closed (by +1.27 points) above the 50-day for the ninth straight session, and the gap expanded. The 50-day moving average closed (by -8.38 points) below the 200-day moving average for the 103rd straight session, but the gap narrowed. The 100-day moving average closed (by -5.28 points) below the 200-day moving average for the 81st straight session, and the gap expanded. The BKX closed above its 20-day moving average for the 20th time in the last 21 sessions. The index closed above its 50-day moving average for the 19th time in 20 sessions. The index closed below the 100-day moving average for the sixth straight session and below its 200-day moving averages for the 111th consecutive session. The index closed below 50.0 for the 111th straight session and closed below the 40.0 level for the fourth time in five sessions. The directional movement indicator is positive, narrowly, for the 16th straight session, and the trend is weak and decreasing. Relative strength rose to 53.80 from 52.61, a neutral range. Next resistance is 40.13; next support at 39.40.