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U.S. Equity Futures Moderately Lower as Focus Shifts to Surging French, Spanish Sovereign Debt Yields

|Includes:The Bank of New York Mellon Corporation (BK), C, CMA, COF, CYN, GNW, MET, RF, SNV
This morning.   The current market uptrend is under pressure. U.S. equity futures are moderately lower, but off the morning’s lows.  Asian equity markets closed mixed on mixed volume. European markets are moderately lower. Italian bond yields are again above 7.0% as Prime Minister-designate Monti works to form a credible “technical cabinet” and new government. Of equal interest, French 10-year bond yields surged more than 25 bps today, to 3.68%, their highest level since April. The dollar is stronger on the day, and the euro correspondingly weaker on Eurozone uncertainties. U.S. equity options markets suggest a neutral short-term outlook.   Commodities prices are mixed.  U.S. Treasury yields are slightly lower at the long end of the curve.  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 -3.12 points, December SPX equity futures are at 1243.10, down -6.28 points.  The SPX opens at 1251.78, -8.20% below its April 29 multi-year 1363.61 closing high, +0.43% above its 20-day and +4.11% above its 50-day moving averages.  The SPX is -0.47% below its 1257.64 year-end close.  Next resistance is at 1261.53; next support is at 1244.36.
Monday.  Led by financials, U.S. equity markets lost ground, with the focus on European developments, as there were no domestic economic reports. Volumes were the slowest of the year, an anemic 0.65x the 50-day moving average. The NYSE composite lost -1.09%. The SPX, Nasdaq, and DJI closed off -0.96%, -0.80%, and -0.61%, respectively.  All market segments closed at least -0.54% lower. Technology, health care, and consumer goods led, with losses of at least -0.54%. Utilities, oil and gas, and financials closed off at least -1.15%. Financials lost -1.98%.
European sovereign bond yields resumed their ascent, with Spanish 10-year debt back at their August/September highs. Negative headlines included reports that Germany was studying a process by which countries could exit the Eurozone, no mechanism to lever the EFSF, an announcement by UniCredit, the largest Italian bank, that it would issue €7.5 billion in new common equity. Trading desk commentary focused on “reluctant optimism” in U.S. equities, i.e., that the larger fear is to miss a year-end rally than of returning to a sell-off as in August and September.
Financials and Energy were the worst performing sectors. The BKX and insurance names underperformed as STI, C and RF led the banks, and GNW and MET led the insurers lower.
The day’s losses came on lower volume, leaving the distribution day count unchanged. 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 closed mixed, with mixed volume.  In Japan, the Nikkei fell -0.72%.  Volume fell -22.9%.  The Hang Seng fell -0.82%, on a +207.7% increase in volume.  HSI volatility rose +1.97%.  The Shanghai composite rose +0.04%, on a -2.47% decrease in volume.  In Japan, commentary focused on the low volume, attributing the slow turnover to concerns that European concerns will not be effectively addressed. In China, markets focused on higher Italian sovereign bond yields.
In Japan, the NKY closed at 8,603.70, up from 8,514.47 at the prior close.  The NKY closed -2.46% below its 20-day moving average and down -16.5% for the year.  The NKY gapped lower to support at 8,540, and rallied weakly on low volume to a mid-morning intraday high of 8,584.30. Absent evidence of much buying enthusiasm, the index trended lower to a late afternoon intraday low of 8,527.63 before a tepid rally at the close.  All market segments closed at least -0.06% lower. Leaders were health care, telecommunications, and industrials. Financials lost -0.96%. Laggards were basic materials, utilities, and oil and gas, which lost at least -1.12%.
In China, the Hang Seng Index closed at 19,348.44, down from 19,508.18 at the prior close.  The index gapped lower to open at 19,305.30, the traded to a mid-morning intraday high of 19,420.10, before weakening through late afternoon down to the 19,240.30 intraday low. A late rally narrowed the day’s losses. The index ended +0.79% and +2.66% above its respective 20-day and 50-day moving averages.  Most market segments closed lower. Consumer goods managed a +0.01% gain. Other leaders were telecommunications and basic materials, which lost at least -0.16%. Financials dropped -0.93%. Laggards were consumer services, oil and gas, and technology, which lost at least -1.24%.
In Shanghai, SHCOMP closed at 2,529.76, up from 2,528.18 at the prior close.  The index opened at 2,525.95, and traded within a narrow ±10 point range through the session. The 2,534.06 intraday high was reached in the first hour, and the 2518.70 intraday low just before mid-day. The SHCOMP closed +3.19% and +2.98% above its respective 20-day and 50-day moving averages.  Market segments closed mixed.  Utilities, technology, and health care closed at least +0.73% higher. Laggards were oil and gas, financials, and telecommunications lagged with losses of at least -0.36%.
In Europe, equities opened lower as the Italian prime minister designate struggled to form a new government. Also, Italian sovereign debt yields approached and exceeded 7.0%, and the euro weakened against the dollar. The Euro Stoxx 50, FTSE, and DAX are down -1.87%, -0.96%, and -1.80%, respectively.  Compared to the prior day’s 2,288.32 close, the EuroStoxx50 trades at 2,244.58, compared to the 2,227.88 intraday low.  All market segments are at least -0.92% lower.  Leaders are heath care, technology, and oil and gas, which are down at least -0.93% lower.  Consumer services, industrials, and financials are lagging with losses of at least -1.91%.
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.   USD LIBOR is 0.14389%, up from  0.14222% Monday and below the 0.25188% year-end level.  USD 3-month LIBOR rose to 0.46556%, the highest of the year, up from 0.46056% the prior day and compared to 0.30281% at year-end 2010.
  • The US Libor-OIS (LOIS) spread rose to 37.8 bps, the highest level of the year, up from 37.4 bps Monday and compares to 12.0 bps at the end of 2010.  Euribor-OIS rose to 90.6 bps, up from 89.4 bps Monday, 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 10.0 bps, unchanged from 10.0 bps Monday, but well off from a recent high of 33 bps on August 2nd.
  • U.S. Treasury yields lower, with 2- and 10-year maturities yielding 0.222% and 2.003%, respectively, compared to 0.230% and 2.056% Monday.  The yield curve narrowed to +1.781%, compared to +1.826% 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 stronger against the euro and pound, but slightly weaker against the yen.  The dollar trades at US$77.872, compared to US$77.569 the prior day, and above its US$77.233 50-day, US$75.878 100-day, and US$75.719 200-day averages.  The euro trades at US$1.3542, compared to US$1.3633 Monday and US$1.3750 the day prior.  The euro trades worse than its US$1.3700 50-day and US$1.4005 100-day averages.  In Japan, the dollar trades at ¥76.96, compared to ¥77.07 Monday and ¥77.20 the prior day.  The yen trades worse than its 50-day moving average ¥76.962.
  • Commodities prices are mixed, with mixed energy, lower precious metals, higher aluminum and copper, and generally higher agriculture prices.
Volatility, Skew:
  • The VIX ended at 31.13, up +3.63% from 30.04 at the prior close.  The VIX is +0.58% above its 20-day moving average 31.06.
  • The Euro Stoxx 50 volatility index (V2X) is up +4.99% to 42.18 from 40.58 the prior day.  The V2X index trades +6.97% above its 39.41 20-day moving average, -31.6% below the 49.02 30-day high, and +48.9% above the 28.29 30-day low.
  • The Hang Seng volatility index (VHSI) rose +1.97% to 33.60 from 32.95 the prior day.  The VHSI index trades -4.62% below its 35.23 20-day moving average.
  • CBOE skew fell -0.54% to 124.56 from 125.24 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.  Economic reporting begins tomorrow at 8:30, with the October producer price index, advance retail sales, and November Empire manufacturing.  Reports surprised positively, with a -0.3% PPI (survey -0.1%), +0.5% advance retail sales (survey +0.3%), and +0.61 Empire manufacturing (survey -2.00). At 10:00, September business inventories are released.
Overseas news: Today, Italian 10-year yields again crossed above the 7.0% threshold while a sell-off in French bonds accelerated, lifting 10-year yields by +29 basis points and the spread over German bunds to +189 basis points.  Today, Spain sold €3.2 billion of 12- and 18-month bills, with yields rising +140 bps and +136 bps over the September auctions with both yields above 5.0%.  In the third quarter, Eurozone, German, and French GDP rose +0.2%, +0.5%, and +0.4% over the prior quarter, each in-line with expectations.  In November, the German ZEW economic expectations index fell for the ninth straight month to -55.2, down from -48.3 in October and below -52.0 estimates.  Today, the IMF warned of asset bubble vulnerabilities within the Chinese banking system.  Today, Jordan’s King Abdullah urged Syria’s Assad to step down, becoming the first Arab leader to make such a call. 
Company news/ratings changes:
  • COF – October credit card net charge offs and delinquencies rise to 3.96% and 3.73%, respectively, up from 3.90% and 3.65% in September
  • SNV – added to Conviction Buy list at Evercore
  • CYN/CMA – removed from Conviction Buy list at Evercore
3Q2011 Earnings.  The third quarter’s earnings reports surprised expectations.  Of the 436 S&P500 companies that reported earnings to date, 73% (319 out of 436) 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 12.6x estimated 2011 earnings ($99.13) and 11.5x estimated 2012 earnings (decreased to $109.23 from $111.57), compared to 12.7x and 11.6 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 +4.8%, and +1.8%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.9% and +28.8%, respectively. 
Large-cap banks trade at a median 1.19x tangible book value, and 10.9x and 9.5x 2011 and 2012 consensus earnings, respectively, compared to 1.20x tangible book value and 11.1x/9.8x 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 +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 1.11, compared to 0.93 the prior day and below its 5- and 10-period moving averages of 1.15 and 1.14, respectively.  The index put/call ratio closed at 1.46, compared to 1.16 the prior day and below the 5- and 10-period moving averages of 1.55 and 1.56, respectively.  The equity put/call ratio closed the day at 0.73, compared to 0.64 the prior day and in between its 5- and 10-period moving averages of 0.73 and 0.73, respectively.   
NYSE Indicators.  Volume fell another -6.86% to 709.97 million shares, the lightest of 2011, from 762.30 million shares the prior day, 0.65x the 1.085 billion share 50-day moving average.  Market breadth was negative,  and up volume lagged down volume.  Advancing stocks lagged decliners by -1,585 (compared to 2,177 the prior day), or 0.31:1.  Up volume lagged down volume by 0.17:1.
SPX. On the lightest volume this year, the SPX fell -12.07 points, or -0.96%, to end at 1251.78.  Volume fell -7.49% to 533.61 million shares, down from 576.79 million shares Friday and below the 845.98 million share 50-day moving average. For the 65th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1202.33 vs. 1272.10, respectively)The SPX closed above its 200-week moving average (1137.55) for the 27th straight session. 
From its prior close at 1263.80, the SPX gapped lower at the open to 1257, but rose to 1260 at 9:45, setting the intra-day high.  Through 11:35, the index traded in a narrow ±5 point range between 1255 and 1260 before a 11:45 sell-off dropped the index to the 1246 level by 12:35.  Through 1:40, the SPX attempted a rebound, and reached 1253.  From 2:15 through 3:00, the index sold off again, setting the intra-day low of 1246.68.  A closing bell rally lifted the index back to 1254 by 3:40, but stocks gave up a little of those gains in trading’s final 10 minutes.   
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 the prior week’s sharp losses place the trend under pressure.   The SPX closed below 1300 for the 76th straight session but above 1200 for the 24th straight session.  The index closed above its April 2010 highs for the 15th time in the previous 16 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 +0.43%) above its 20-day moving average (1246.46) for the second straight session.  The index closed (by +4.11%) above its 50-day moving average for the 25th straight session.  The index closed (by +1.99%) above its 100-day moving average (1227.34) for the 13th time in 14 sessions.  The SPX closed -1.60% below its 200-day moving average, closing below that average for the 10th time in 11 sessions.  The 20- and 50-day moving averages rose.  The directional momentum indicator is positive for the second straight session, and the trend is weak and declining.  Relative strength fell to 53.58 from 56.04, a neutral range.  Next resistance is at 1244.36; next support is at 1261.53.
BKX.  On lower volume, the KBW bank index fell -0.97 points, or -2.45%, to end at 38.57, recording the 71st close below the prior 52-week low of 42.70 from August 25, 2010 and finishing below the 40-level for the sixth time in the last seven sessions.  Volume fell -2.34% to 70.49 million shares, down from 72.18 million shares Friday and below the 104.62 million share 50-day average. The BKX closed -10.26% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -33.44% and -30.67% below its April 23, 2010, and February 14, 2011 respective closes.
Financials were the market’s worst performing sector, and regionals underperformed large-cap banks.  From its prior close at 39.54, the BKX gapped lower to 39.25 and set the intra-day high of 39.29 at 9:40.  Financials sold off through most of the day, with the BKX crossing quickly below 39.00 by 9:45 and 38.80 by 11:45.  The index breached 38.50 at 2:20 and set the intra-day low of 28.29 at 3:00.  The BKX rallied in the last hour and reached 38.70 at 3:45 before giving up some of those gains in the final minutes. 
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 the prior week’s sharp losses placed the trend under pressure.  The BKX has now recorded its 24th 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 (37.84) crossed below the 100- and 200-day moving averages (40.51 and 45.84, respectively) on April 25th and June 16th.  The 20-day closed (by +1.61 points) above the 50-day for the 15th straight session, and the gap expanded.  The 50-day moving average closed (by -8.00 points) below the 200-day moving average for the 109th straight session, but the gap narrowed.  The 100-day moving average closed (by -5.33 points) below the 200-day moving average for the 87th straight session, and the gap expanded.  The BKX closed below its 20-day moving average for the fourth time in five sessions.  The index closed above its 50-day moving average for the 24th time in 25 sessions.  The index closed below the 100-day moving average for the 11th straight session and below its 200-day moving averages for the 116th consecutive session.  The index closed below 50.0 for the 116th straight session and below the 40.0 level for the sixth time in seven sessions.  The directional movement indicator switched to negative for the first time in 21 sessions, and the trend is weak and declining.  Relative strength fell to 48.74 from 52.09, a neutral range.  Next resistance is 39.16; next support at 38.13.