This morning. Equity markets are in correction, with all the major indexes below their 20-, 50-, 100-, and 200-day moving averages. U.S. equity futures are exceptionally strong, following a strong equity rebound in Europe and rebounding from several consecutive days’ losses on all the major indexes. Asian equity markets closed higher on mixed volume. European markets are significantly higher and are trading at their best levels of the day. The dollar is weaker, and the euro is correspondingly stronger. U.S. equity options markets suggest a neutral short-term outlook. Commodities prices are higher. U.S. Treasury yields are higher, but the 10-year yield moving back above 2.0%. U.S. repo rates have moved higher. Overnight and 3-month LIBO remains elevated. Euribor-OIS spreads are near 2011 highs. After a fair value adjustment of +3.67 points, December SPX equity futures are at 1187.30, up +30.83 points. The SPX opens at 1158.67, -15.0% below its April 29 multi-year 1363.61 closing high, -6.02% below its 20-day and -3.94% below its 50-day moving averages. The SPX is -7.87% below its 1257.64 year-end close. Next resistance is at 1168.00. Next support is at 1154.00.
Friday. The fade of U.S. equity markets continued, as indexes erased strong morning gains, fading in the final two hours of the holiday-curtailed session. The Nasdaq was the first index to turn lower, pulling the others lower. The Nasdaq closed own -0.75%, while the NYSE composite, SPX, and DJI lost -0.31%, -0.27%, and -0.23%, respectively. Market segments were mixed. Leaders were utilities, financials, and consumer goods, which closed higher. Laggards were basic materials, technology, and oil and gas, which ended down at least -0.52%. Indexes again closed below technical support.
From its prior 1161.79 close, the SPX gapped higher to a mid-morning intraday high of 1172.66 (back above 1171, the October 7th high), but investors sold into the strength, and by mid-day, most indexes were breakeven or were trading lower. The SPX sold off sharply into the close to end with a 7th consecutive loss and ended just above support at 1158, a 61.8% Fibonacci retracement of gains from recent highs.
In Asia, equity markets closed higher, with strong gains in Tokyo and Hong Kong. Volume declined in Tokyo, but rose in Hong Kong and Shanghai. In Tokyo, the NKY rose +1.56%. Volume fell -8.11%. In Hong Kong, the Hang Seng rose +1.97%, on +20.7% increase in volume. The Shanghai composite rose +0.12% on a +1.55% increase in volume. Commentary focused on strong Black Friday retail sales in the U.S. and news that Eurozone countries are negotiating new treaties that would enhance budget disciplines.
In Japan, the NKY closed at 8,287.49, up from 8,160.01 at the prior close. The NKY closed -3.57% below its 20-day moving average and down -19.0% for the year. The index gapped higher to open at 8,269.91 and traded to an mid-morning intraday high of 8,322.01. The index trended down through the close. Most market segments ended higher. Leaders were industrials, oil and gas, and basic materials, which ended up at least +2.04%. Financials added +1.64%. Laggards were telecommunications, health care, and utilities.
In China, the Hang Seng Index closed at 18,037.81, up from 17,689.48 at the prior close. The index gapped higher to open at 18,095.20, and rallied quickly to 18,095.20, then traded within a narrow range, finding support at 17,950. The index ended -5.22% and -3.01% below its respective 20-day and 50-day moving averages. Among market segments, only technology closed lower, down -2.98%. Leaders were consumer goods, financials, and industrials, which closed up at least +2.29%. In addition to technology, other laggards were telecommunications and utilities, which closed up at least +0.72%.
In Shanghai, the SHCOMP closed at 2,383.03, up from 2,380.22 at the prior close. The index opened at 2,383.89, and rallied to a late-morning intraday high of 2,396.83, but traded mid-afternoon back to 2,372.16 before rallying into the close. The SHCOMP closed -3.49% and -2.29% below its respective 20-day and 50-day moving averages. Most market segments closed higher. Leaders were consumer goods, utilities, and oil and gas, which closed up at least +0.45%. Financials added +0.03%. Laggards were consumer services, telecommunications, and technology, which closed at least -0.47% lower.
In Europe, equities are rebounding after last week’s sell-off, on optimism that the Eurozone countries can negotiate stronger budgetary controls and strong U.S. retail sales. The Euro Stoxx 50, FTSE, and DAX indexes are up +3.69%, +2.03%, and +3.25%, respectively. German 5-year CDS rose to 110.8, the highest since early October. French CDS are 247.55, up from 200.99 on October 4th. Italian CDS are 553.00, up from 487.03 in early October. Compared to the prior day’s 2,090.25 close, the Euro Stoxx 50 trades at 2,075.81, compared to the 2,065.75 intraday low. All market segments are higher. Leaders are financials, utilities, and industrials, up at least +3.47%. Laggards are consumer goods, consumer services, and technology, up at least +2.42%.
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 0.14611%, up from 0.14389% Friday, but below the 0.25188% year-end level. USD 3-month LIBOR rose to 0.52306%, the highest of the year, up from 0.51806% the prior day and compared to 0.30281% at year-end 2010.
- The US Libor-OIS (LOIS) spread eased to 41.0 bps, from 40.4 bps, the high for the year, the prior day, and compares to 12.0 bps at the end of 2010. Euribor-OIS rose to 93.3 bps, up from 92.5 bps Friday, 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 was 23.0 bps Friday, up from 16.0 bps Thursday, but well off from the August 2nd high of 33 bps.
- U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.275% and 2.061%, respectively, compared to 0.274% and 1.964% Friday. The yield curve widened to +1.786%, compared to +1.690% Thursday. 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 weaker compared to the euro, yen, and pound. The dollar trades at US$78.887, compared to US$79.686 the prior day, and above its US$77.584 50-day, US$76.221 100-day, and US$75.742 200-day averages. The euro trades at US$1.3372, compared to US$1.3239 Friday and US$1.3347 the day prior. The euro trades worse than its US$1.3633 50-day and US$1.3918 100-day averages. In Japan, the dollar trades at ¥77.70, compared to ¥77.73 Friday and ¥77.12 the prior day. The yen trades better than its 50-day moving average ¥76.992.
- Commodities prices are higher, with higher energy and precious metals, lower aluminum and copper, and higher agriculture prices.
- The VIX ended at 34.47, up +1.44% from 33.98 at the prior close. The VIX is +8.62% above its 20-day moving average 31.74.
- The Euro Stoxx 50 volatility index (V2X) is up -3.47% to 39.37 from 41.48 the prior day. The V2X index trades -2.45% below its 40.34 20-day moving average, -13.2% below the 45.33 30-day high, and +39.1% above the 28.29 30-day low.
- The Hang Seng volatility index (VHSI) fell -9.78% to 32.57 from 36.10 the prior day. The VHSI index trades -7.75% below its 35.31 20-day moving average.
- CBOE skew fell to -114.77, down -1.72% from 116.78 at the prior day’s close, and below a neutral (115-120) range. The index tracks the cost of buying out-of-the-money, long-dated options. A fall suggests that investors are buying more calls than puts, a bullish signal.
U.S. news and economic reporting. Today’s economic reports include October new home sales and the November Dallas Fed manufacturing report, at 10:00 and 10:30, respectively.
Overseas news: Today, the IMF denied it is preparing a €600 billion bailout facility for Italy. Today, Moody’s warned all of Europe’s sovereign credit ratings are now at risk of downgrade from the debt crisis’ rapid escalation. By the end of this week, the European Banking Authority will release the capital shortfalls at each European bank subject to the most recent stress test. Today, Spain’s incoming government denied it will seek international aid for its economy. According to leaked documents that must still be approved by Eurozone finance ministers, the Emergency Financial Stability Fund may provide guarantees worth 30% on Eurozone sovereign bonds. News reports suggest the Greek bond haircut is still not finalized as the government pushes for a harsher 25% value swap, less than the 40-50% banks want and the current agreement.
Company news/ratings changes:
· BBT – raised to buy at Morgan Stanley, $29 price target
· USB – raised to buy at Morgan Stanley, $31 price target
· AXP – cut to hold at Morgan Stanley, $51 price target
· C – cut to hold at Morgan Stanley, $30 price target
· BK – cut to sell at Morgan Stanley, $22 price target
· NTRS – cut to sell at Morgan Stanley, $41 price target
· STT – cut to sell at Morgan Stanley, $40 price target
3Q2011 Earnings. The third quarter’s earnings reports surprised expectations. Of the 464 S&P500 companies that reported earnings to date, 73% (340 out of 464) 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 +15.9% over the prior year. Though challenged in the current operating environment, 80% of companies reported increased revenues over the prior year and 58% 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 11.7x estimated 2011 earnings ($98.99) and 10.6x estimated 2012 earnings ($109.23), compared to 11.7x and 10.6 respective 2011-12 earnings Friday. 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 +28.9%, respectively.
Large-cap banks trade at a median 1.11x tangible book value, and 10.0x and 8.7x 2011 and 2012 consensus earnings, respectively, compared to 1.10x tangible book value and 10.0x/8.6x 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 +29.6% 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 1.32, compared to 1.19 the prior day and above its 5- and 10-period moving averages of 1.10 and 1.13, respectively. The index put/call ratio closed at 1.72, compared to 1.82 the prior day and above the 5- and 10-period moving averages of 1.50 and 1.52, respectively. The equity put/call ratio closed the day at 0.79, compared to 0.72 the prior day and above its 5- and 10-period moving averages of 0.75 and 0.74, respectively.
NYSE Indicators. Equity markets closed at 1:00, and volume was 441.77 million shares, down 49.6% from 876.00 million shares Wednesday, 0.42x the 1.052 billion share 50-day moving average. Market breadth was negative, and up volume lagged down volume. Advancing stocks lagged decliners by -385 (compared to 2,332 the prior day), or 0.76:1. Up volume lagged down volume by 0.68:1.
SPX. On post-Thanksgiving holiday volume, the SPX fell -3.12 points, or -0.27%, to end at 1158.67. Volume fell -51.28% on half-day action to 336.07 million shares, down from 674.99 million shares from Wednesday’s full session and below the 818.70 million share 50-day moving average. For the 73rd straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1206.15 vs. 1267.66, respectively). The SPX closed above its 200-week moving average (1136.51) for the 35th straight session.
From its prior close at 1161.79, the SPX opened flat but rallied strongly to 1170 by 9:45 and reached the intra-day high of 1172.66 by 10:20. The index fluctuated at 1170 through 11:40, when Standard & Poor’s downgraded Belgium’s long term credit rating. The index fell back to break-even by 12:15 and finished its holiday-abbreviated session on a sell-off into negative territory to close at the day’s low.
Technical indicators are negative. The market returned to a correction following mid-November’s reversal. The SPX closed below 1300 for the 83rd straight session and below 1200 for the fourth straight session. The index closed below its April 2010 highs for the sixth straight session. 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 index closed below all major moving averages for the fourth second straight session. The SPX closed (by -6.02%) below its 20-day moving average (1232.92) for the seventh straight session. The index closed (by -3.94%) below its 50-day moving average for the fourth straight session. The index closed (by -4.93%) below its 100-day moving average (1218.72) for the sixth straight session. The SPX closed -8.60% below its 200-day moving average, closing below that average for the 18th time in 19 sessions. All moving averages fell. The directional momentum indicator is negative for the sixth straight session, and the trend is weak and increasing. Relative strength fell to 36.39 from 36.88, a neutral range. Next resistance is at 1168.00; next support is at 1154.00.
BKX. On post-Thanksgiving volume, the KBW bank index rose +0.18 points, or +0.52%, to end at 34.90, recording the 79th close below the prior 52-week low of 42.70 from August 25, 2010 and finishing below the 40-level for the 14th time in the last 15 sessions. Volume fell -53.96% to 38.83 million shares, down from 73.97 million shares Wednesday and below the 101.50 million share 50-day average. The BKX closed -18.80% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -39.78% and -37.26% below its April 23, 2010, and February 14, 2011 respective closes.
Financials outperformed the market, and large-cap banks outperformed regional banks. From its prior close at 34.72, the BKX opened flat but with strong momentum. By 9:50, the index reached 35.35 and set the intra-day high of 35.52 at 10:21, up +2.25%. The index held at the 35.30 level through 11:40, when S&P’s Belgium downgrade hit markets. The index retraced gains to 34.80 by 12:20, but remained in positive territory. The BKX rallied into the bell but finished at the lower end of the day’s range.
Technical indicators are mostly negative. Bank stocks are leading the market’s direction, which returned to correction following mid-November’s reversal. The BKX saw its fifth straight close below the 50-day moving average, having closed above that level consistently since October 12th. Moving averages align bearishly, as most shorter duration averages are below the longer duration averages and all moving averages are falling. The 50-day average (37.72) crossed below the 100- and 200-day moving averages (39.61 and 45.11, respectively) on April 25th and June 16th. The 20-day closed (by +0.71 points) above the 50-day for the 23rd straight session, and the gap narrowed. The 50-day moving average closed (by -7.40 points) below the 200-day moving average for the 117th straight session, but the gap narrowed. The 100-day moving average closed (by -5.50 points) below the 200-day moving average for the 95th straight session, and the gap expanded. The BKX closed (by -9.18%) below its 20-day moving average for the 12th time in 13 sessions. The index closed (by -7.47%) below its 50-day moving average for the sixth straight session. The index closed (by -11.90%) below the 100-day moving average for the 19th straight session and (by -22.64%) below its 200-day moving averages for the 124th consecutive session. The index closed below 50.0 for the 124th straight session and below the 40.0 level for the 14th time in 15 sessions. The directional movement indicator is negative for the ninth straight session, and the trend is weak and increasing. Relative strength rose to 37.08 from 36.13, the lower end of a neutral range. Next resistance is 35.36; next support at 34.59.