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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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  • U.S. Futures Moderately Higher, as Bond Markets Mark Veterans' Day 0 comments
    Nov 11, 2011 8:56 AM | about stocks: GNW, MET, CIM
    This morning.   U.S. equity futures are moderately higher and near the morning’s highs. Asian equity markets also rebounded to close slightly higher on lower volume.  European markets are also moderately higher at mid-day. The dollar is slightly weaker, while the euro is correspondingly stronger.  U.S. equity options markets suggest a neutral short-term outlook.  Commodities prices are mixed.  U.S. Treasury yields are unchanged due to the Veterans’ Day holiday. U.S. repo rates are at low levels.  Overnight and 3-month LIBOR remain elevated, at the year’s highs.  Euribor-OIS spreads are near 2011 highs.  After a fair value adjustment of -0.45 points, December SPX equity futures are at 1249.40, up +12.45 points.  The SPX opens at 1239.70, -9.09% below its April 29 multi-year 1363.61 closing high, -0.18% below its 20-day and +3.34% above its 50-day moving averages.  The SPX is -1.43% below its 1257.64 year-end close.  Next resistance is at 1248.04; next support is at 1229.52.
    Thursday.  U.S. equity markets recovered a portion of Wednesday’s losses, as a better than expected Italian 1-year debt offering boosted confidence.  Volumes fell back to 0.82x the 50-day moving average. The DJI and NYSE composite turned in the day’s best performances with gains of +0.96%. The SPX and Nasdaq added +0.86% and +0.13%, respectively. All market segments closed higher. Oil and gas, health care, and consumer goods led with gains of +1.08%. Utilities, financials, and technology lagged, but gained at least +0.07%. 
    Futures indicated a moderate rebound, and from the prior close of 1229.10, the SPX gapped up to 1245 before easing quickly back to the 1227.70 intraday low at 10:45. Improved clarity regarding the prospective change in the Italian government helped spark a rebound, and following the recent trading pattern, the SPX began to strengthen. A mid-day clarification by S&P that there was no change in Frances sovereign debt ratings spurred markets to an intraday high of 1246.22 shortly after 2:00.  By 3:30, the SPX traded back to 1235, then rallied mildly into the close.
    Trading desk commentary noted the relatively quiet trading activity, with most activity from hedge funds. These were said to be better for sale, but without great conviction in front of today’s bond market holiday. Desks also noted an improved view of European developments, in which U.S. markets are +15% higher since the October low, and only of -1% in November despite all the events in Greece and Italy and speculation regarding French sovereign debt downgrades.

    Distribution days number 5 on the SPX and NYSE composite, and 4 on the DJI and Nasdaq, since the uptrend commenced on October 4th.
    In Asia, equity markets scratched back some of its prior day’s losses. In Japan, the Nikkei rose +0.16%.  Volume fell -16.7%.  The Hang Seng rose +0.91%, on a -48.6% decrease in volume.  HSI volatility fell -8.17%.  The Shanghai composite rose +0.06%, but volume fell -23.5%.  In Japan, commentary focused on domestic issues, particularly the Olympus Corp delisting. In Hong Kong, traders cited improving U.S. labor data and easing European concerns. In Shanghai, the focus was how the European debt crisis would deepen the slowdown of the Chinese economy.
    In Japan, the NKY closed at 8,514.47, up from 8,500.80 at the prior close. The NKY closed -3.03% below its 20-day moving average and is down -16.8% for the year.  The NKY gapped higher to open at 8,545.92, but sold off to a mid-morning intraday low of 8,485.77.  The index rallied into the afternoon, but found resistance at 8,560 and trended lower to end with a narrow gain, but lower for the week. Market segments were mixed. Leaders were industrials, technology, and basic materials, up at least +0.39%. Laggards were financials, utilities, and health care, down at least -0.44%.
    In China, the Hang Seng Index closed at 19,137.17, up from 18,963.89 at the prior close.  The index gapped higher to open at 19,143.60.  The index rallied to 19,200 in the first half hour, but found resistance and traded back below 19,000 at mid-day. In the afternoon, the index rallied back to test resistance at 19,200, failing twice and trending lower into the close. The index ended +0.02% and +1.31% above its respective 20-day and 50-day moving averages.  Market segments were mostly higher, led by oil and gas, telecommunications, and basic materials, which added at least +1.35%. Financials added +0.62%. Utilities, consumer services, and technology lagged, with the latter off -1.07%.
    In Shanghai, SHCOMP closed at 2,481.08, up from 2,479.54 at the prior close.  The index opened at 2,483.96, but traded within a narrow range until rallying to 2,495 at mid-morning. The 2,496.53 intraday high was set mid-afternoon, but traders reduced positions in front of the weekend, and the index sold off to the intraday low of 2,472.76 in the final half hour, before rallying into the close. The SHCOMP closed +1.49% and +0.82% above its respective 20-day and 50-day moving averages.  Market segments were mixed. Oil and gas, financials, and utilities closed at least +0.15% higher. Industrials, health care and telecommunications lagged with losses of at least -0.16%.
    In Europe, equities opened slightly higher, but gained strength as the morning trade progressed. Commentary focuses of Italian parliamentary votes on austerity and the prospective change in government, which markets have well received. The euro is slightly stronger today against the dollar. The Euro Stoxx 50, FTSE, and DAX are up +1.19%, +0.62%, and +1.26%, respectively.  Compared to the prior day’s 2,254.92 close, the EuroStoxx50 trades at 2,281.97, compared to the 2,289.95 intraday high.  With the exception of health care, all market segments are at least +0.46% higher.  Leaders are financials, utilities, and industrials, which are at least +1.30% higher.  Consumer services and telecommunications lag but are ata least +0.52% higher. Health care is down -0.02%.
    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.   U.S. Treasury markets are closed for the Veterans Day Holiday. USD LIBOR was 0.14111% Thursday, up from 0.14056% the prior day and below the 0.25188% year-end level.  USD 3-month LIBOR rose to 0.45722%, the highest of the year, up from 0.45278% the prior day and compared to 0.30281% at year-end 2010.
    • The US Libor-OIS (LOIS) spread rose to 35.2 bps, down from 36.5 bps Thursday, the highest level of the year, and compares to 12.0 bps at the end of 2010.  Euribor-OIS eased rose to  88.5 bps, down from 86.9 bps, 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 7.0 bps, unchanged from 7.0 bps Thursday, and well off from a recent high of 33 bps on August 2nd.
    • U.S. Treasury yields unchanged due to holiday, with 2- and 10-year maturities yielding 0.230% and 2.056%, respectively, compared to 0.226% and 1.961% Wednesday.  The yield curve was +1.792%, compared to +1.735% 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 slightly weaker against the euro and yen, but slightly stronger against the pound.  The dollar trades at US$77.546, compared to US$77.743 the prior day, and above its US$77.157 50-day, US$75.834 100-day, and US$75.725 200-day averages.  The euro trades at US$1.3639, compared to US$1.3606 Thursday and US$1.3542 the day prior.  The euro trades worse than its US$1.3717 50-day and US$1.4019 100-day averages.  In Japan, the dollar trades at ¥77.39, compared to ¥77.65 Thursday and ¥77.82 the prior day.  The yen trades worse than its 50-day moving average ¥76.977.
    • Commodities prices are mixed, with mixed energy, precious metals, aluminum, and copper, and agriculture prices.
    Volatility, Skew:
    • The VIX ended at 32.81, down -9.26% from 36.16 at the prior close.  The VIX is +5.93% above its 20-day moving average 30.97.
    • The Euro Stoxx 50 volatility index (V2X) is down -6.00% to 41.07 from 43.72 the prior day.  The V2X index trades +4.99% above its 39.11 20-day moving average, -21.9% below the 52.62 30-day high, and +45.2% above the 28.29 30-day low.
    • The Hang Seng volatility index (VHSI) fell -8.17% to 35.06 from 38.18 the prior day.  The VHSI index trades -0.74% below its 35.32 20-day moving average.
    • CBOE skew rose +1.93% to 125.24 from 122.87 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.  There are two scheduled economic reports. The Federal monthly budget statement showed a deficit of -$98.5 billion in October, narrower than the expected -$102.5 billion. At 9:55, the University of Michigan releases its preliminary November confidence report, with a survey of 61.5.
    Overseas news: Italian Prime Minister Berlusconi will likely resign this weekend with Mario Monti likely selected to form a new government.  In the third quarter, Spain’s GDP rose +0.8% over the prior year, ahead of estimates for +0.7% growth.  In October, China bank loans rose +15.8% over the prior year and +1.7% over the prior month with the pace of sequential growth accelerating.
    Company news/ratings changes:
    • GNW – upgraded to neutral at Citi, $8.00 price target
    • MET – upgraded to neutral at Janney
    • CIM – requested an extension for their 10-Q filing due to an accounting change on other-than-temporary impairment issues
    3Q2011 Earnings.  The third quarter’s earnings reports surprised expectations.  Of the 427 S&P500 companies that reported earnings to date, 73% (311 out of 427) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +4.8% (versus a historical average of +2%).  EPS is up +16.4% 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 12.5x estimated 2011 earnings ($99.01) and 11.4x estimated 2012 earnings (decreased to $109.23 from $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 +4.6%, and +1.8%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.8% and +28.8%, respectively. 
    Large-cap banks trade at a median 1.19x tangible book value, and 10.8x and 9.6x 2011 and 2012 consensus earnings, respectively, compared to 1.18x tangible book value and 10.6x/9.4x 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 +28.9% 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 1.16, compared to 1.33 the prior day and below its 5- and 10-period moving averages of 1.16 and 1.16, respectively.  The index put/call ratio closed at 1.63, compared to 1.66 the prior day and in between the 5- and 10-period moving averages of 1.60 and 1.63, respectively.  The equity put/call ratio closed the day at 0.76, compared to 0.89 the prior day and above its 5- and 10-period moving averages of 0.75 and 0.72, respectively.
    NYSE Indicators.  Volume fell -19.1% to 900.15 million shares, from 1.123 billion shares Wednesday, 0.82x the 1.095 billion share 50-day moving average.  Market breadth was positive,  and up volume led down volume.  Advancing stocks led decliners by +1,161 (compared to -2,517 the prior day), or 2.26:1.  Up volume led down volume by 2.61:1.
    SPX. On lower volume, the SPX rose +10.60 points, or +0.86%, to end at 1239.70.  Volume fell -17.55% to 703.29 million shares, down from 852.91 million shares Wednesday and below the 853.27 million share 50-day moving average. For the 63rd straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1199.59 vs. 1272.33, respectively)The SPX closed above its 200-week moving average (1137.79) for the 25th straight session. 
    From its prior close at 1229.10, the SPX gapped higher to 1242 and reached 1245 by 9:33.  Through 10:50, the index fell, retracing gains back to the break-even line and setting the intra-day low of 1227.70, barely in negative territory.  Through 11:45, the index rallied back to 1242 before a brief retracement to 1235 at 12:40 gave way to another rally.  The index set the intra-day high of 1246.22 at 1:15.  Through 3:00, gains retraced on a consistent downward trajectory, reaching 1235 by 3:00.  The index rallied into close, retaking the 1240 level a few times but falling just below that level at the bell. 
    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.  November 8th’s strong gains in higher volume reconfirmed the uptrend after last week’s sharp losses place the trend under pressure.   The SPX closed below 1300 for the 74th straight session but above 1200 for the 22nd straight session.  The index closed above its April 2010 highs for the 13th time in the previous 14 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 -0.18%) below its 20-day moving average (1241.95) for the second straight session.  The index closed (by +3.34%) above its 50-day moving average for the 23rd straight session.  The index closed (by +0.96%) above its 100-day moving average (1227.89) for the 11th time in 12 sessions.  The SPX closed -2.56% below its 200-day moving average, closing below that average for the eighth time in nine sessions.  The 20- and 50-day moving averages rose.  The directional momentum indicator is negative for the second straight session, and the trend is weak and declining.  Relative strength rose to 51.94 from 50.04, a neutral range.  Next resistance is at 1248.04; next support is at 1229.52.
    BKX.  On lower volume, the KBW bank index rose +0.30 points, or +0.78%, to end at 38.73, recording the 69th close below the prior 52-week low of 42.70 from August 25, 2010 and finishing below the 40-level for the fourth time in the last five sessions.  Volume fell -23.19% to 88 million shares, down from 104.54 million shares Wednesday and below the 105.68 million share 50-day average. The BKX closed -9.89% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -33.17% and -30.38% 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 38.43, the BKX gapped higher to 39.00 and reached the intra-day high of 39.19 at 9:45.  Through 11:40, the index retraced all gains and fluctuated between small gains and losses at the 38.45 level.  A sharp rally at 11:45 lifted the BKX to 38.80, but the rally was sold at 12:25 down to the intra-day low of 38.36, in negative territory.  By 1:15, the index rallied again, reaching 39.00, but again failed to hold onto its gains.  At 3:00, the index retreated back to 39.50.  The BKX rallied into the close to finish with gains and in the middle of the day’s range. 
    Technical indicators are negative but improvingBank stocks are leading the market’s direction, which switched to an uptrend after October 13’s confirmation of October 4th’s strong reversal.  November 8th’s strong gains in higher volume reconfirmed the uptrend after last week’s sharp losses placed the trend under pressure.  The BKX has now recorded its 22nd 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 some gaps are narrowing and some averages are rising.  The 50-day average (37.79) crossed below the 100- and 200-day moving averages (40.67 and 45.99, respectively) on April 25th and June 16th.  The 20-day closed (by +1.48 points) above the 50-day for the 13th straight session, and the gap expanded.  The 50-day moving average closed (by -8.20 points) below the 200-day moving average for the 107th straight session, but the gap narrowed.  The 100-day moving average closed (by -5.32 points) below the 200-day moving average for the 85th straight session, and the gap expanded.  The BKX closed below its 20-day moving average for the second straight session.  The index closed above its 50-day moving average for the 22nd time in 23 sessions.  The index closed below the 100-day moving average for the ninth straight session and below its 200-day moving averages for the 114th  consecutive session.  The index closed below 50.0 for the 114th straight session and below the 40.0 level for the fourth time in five sessions.  The directional movement indicator is positive for the 19th straight session, and the trend is weak and declining.  Relative strength rose to 49.39 from 48.39, a neutral range.  Next resistance is 39.16; next support at 38.33.
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