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Gary Townsend
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Gary Townsend - Since 2007, a founding partner, CEO and Portfolio Manager of Hill-Townsend Capital LLC, a long/short equity financial sector fund based in Chevy Chase, Maryland. Mr. Townsend has 30 years banking, regulatory, and investment experience. He started his business career in 1978, as... More
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  • U.S. Futures Higher, But Off Best Levels As Yesterday's Strong Rally Fades 0 comments
    Nov 29, 2011 9:00 AM | about stocks: PNC, ZION, BAC
    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 higher, but off their best levels of the morning, as strong “Black Friday” and “cyber Monday” retail sales suggest stronger than anticipated U.S. economic growth in 4Q2011. Asian equity markets closed higher on increased volume.  European markets are higher but below their best levels of the day.  The dollar is weaker, and the euro somewhat stronger.  U.S. equity options markets suggest a neutral short-term outlook.   Commodities prices are mostly higher.  U.S. Treasury yields are mixed, with slightly higher yields at the long end of the curve. U.S. repo rates are lower again after a late week surge. Overnight and 3-month LIBO remains elevated.  Euribor-OIS spreads are near 2011 highs.  After a fair value adjustment of +0.00 points, December SPX equity futures are at 1194.50, up +3.50 points.  The SPX opens at 1192.55, -12.5% below its April 29 multi-year 1363.61 closing high, -2.91% below its 20-day and -1.09% below its 50-day moving averages.  The SPX is -5.18% below its 1257.64 year-end close.  Next resistance is at 1207.04.  Next support is at 1168.36.
    Monday.  After finding support at 1158, a 61.8% Fibonacci retracement of gains from recent highs, equity markets rebounded strongly, led by the Nasdaq, which posted a +3.52% gain. The NYSE composite, SPX, and DJI gained +3.22%, +2.92%, and +2.59%, respectively. Volume rebounded, but remained below the 50-day moving average. SPX market segments closed at least +1.33%. Leaders were basic materials, oil and gas, and technology, which gained at least +3.49%. Financials gained +3.02%. Laggards were telecommunications, consumer goods, and utilities. utilities, financials, and consumer goods, which closed higher.
    From its prior 1158.67 close, the SPX opened at 1179, traded quickly to an intraday high of 1197.35. The SPX traded sideways through mid-day, and faded to an afternoon low of 1185, but rallied into the close.
    Trading desk commentary debated the likelihood that yesterday’s gains signaled another “hopium” rally, as in October. Focus remains on the latest Eurozone developments and Black Friday and Cyber Monday retail sales results, which surprised positively. Sentiment remains skeptical, with equity gains attributed to short covering more than real additions to equity portfolios. One desk noted that Treasuries rallied through the day, observing that this isn’t a great signal for risk assets. And while banks were strong at the open, the money center banks, notably BAC, gave back most of their gains and even traded lower in late afternoon before the closing rally. After the close, Fitch lowered its outlook on U.S. debt to negative from stable, though the change was anticipated.
     

    In Asia,     equity markets closed higher, with strong gains on increased volume. In Tokyo, the NKY rose +2.30%.   Volume rose +13.7%.  In Hong Kong, the Hang Seng rose +1.21%, on a +51.8% increase in volume.  The Shanghai composite rose +1.23% on a +19.8% increase in volume.  In Japan, commentary focused on the rebound in shipping and steelmaking stocks. In China, commentary focused on the meeting Eurozone finance ministers. 
    In Japan, the NKY closed at 8,477.82, up from 8,287.49 at the prior close.  The NKY closed -0.99% below its 20-day moving average and down -17.1% for the year.  The index gapped higher to open at 8,371.01, but traded sideways within a narrow range through mid-day. The index gathered strength through the afternoon, and finished at its intraday high. All market segments ended higher.  Leaders were industrials, technology, and basic materials, which closed up at least +2.93%. Financials, telecommunications, and utilities lagged, but closed up at least +0.31%.
    In China, the Hang Seng Index closed at 18,256.20, up from 188,037.81 at the prior close.  The index gapped higher to open at 18,225.10, but gave back most of the gain in early trading, then strengthened into the afternoon session to an intraday high of 18,372.40 before weakening in the final two hours. The index ended -3.61% and -1.72% below its respective 20-day and 50-day moving averages.  Among market segments, only utilities closed lower, off -0.52%. Leaders were consumer goods, consumer services, and industrials, which closed up at least +1.61%. Financials gained +1.48%. Other laggards were technology and telecommunications, which managed gains of at least +0.07%.
    In Shanghai, the SHCOMP closed at 2,412.39, up from 2,383.03 at the prior close.  The index opened at 2,398.99, and after some initial give back, began a mid-morning rally that strengthened through the afternoon. The index closed just short of its 2,413.33 intraday high. The SHCOMP closed -2.13% and -1.00% below its respective 20-day and 50-day moving averages.  All market segments closed up at least +0.78%. Leaders were basic materials, industrials, and technology, which closed up at least +1.42%. Laggards were financials, consumer goods, and oil and gas.
    In Europe, equities are up modestly following yesterday’s surge. Commentary focuses on a successful, if expensive Italian bond offering. The Euro Stoxx 50, FTSE, and DAX indexes are up +0.37%, +0.13%, and +0.38%, respectively.  Compared to the prior day’s 2,221.76 close, the Euro Stoxx 50 trades at 2,229.67, compared to the 2,245.86 intraday high.  Most market segments are higher.  Leaders are industrials, financials, and basic materials, up at least +0.43%.  Laggards are health care, telecommunications, and technology, which are down at least -0.06%.
    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 eased to 0.14500%, from 0.14611% Monday, but below the 0.25188% year-end level.  USD 3-month LIBOR rose to 0.52694%, the highest of the year, up from 0.52306% the prior day and compared to 0.30281% at year-end 2010.
    • The US Libor-OIS (LOIS) spread eased to 42.8 bps, the year’s high, from 41.6 bps the prior day, and compares to 12.0 bps at the end of 2010.  Euribor-OIS eased to 93.95 bps, from 94.0 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 was 14.0 bps Monday, down from 23.0 bps Friday, but well off from the August 2nd high of 33 bps.
    • U.S. Treasury yields are slightly lower at the longer end of the curve, with 2- and 10-year maturities yielding 0.254% and 1.989%, respectively, compared to 0.254% and 1.974% Monday.  The yield curve widened to +1.735%, compared to +1.720% 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$78.804, compared to US$79.263 the prior day, and above its US$77.627 50-day, US$76.254 100-day, and US$75.749 200-day averages.  The euro trades at US$1.3346, compared to US$1.3320 Monday and US$1.3239 the day prior.  The euro trades worse than its US$1.3625 50-day and US$1.3911 100-day averages.  In Japan, the dollar trades at ¥77.80, compared to ¥77.98 Monday and ¥77.73 the prior day.  The yen trades worse than its 50-day moving average ¥77.025.
    • Commodities prices are mostly higher, with mostly higher energy, lower precious metals, higher aluminum and copper, and higher agriculture prices.
    Volatility, Skew:
    • The VIX ended at 32.13, down -6.79% from 34.47 at the prior close.  The VIX is +0.05% above its 20-day moving average 32.12.
    • The Euro Stoxx 50 volatility index (V2X) is down -0.46% to 38.79 from 39.37 the prior day.  The V2X index trades -4.31% below its 40.53 20-day moving average, -14.4% below the 45.33 30-day high, and +37.1% above the 28.29 30-day low.
    • The Hang Seng volatility index (VHSI) fell -5.96% to 30.63 from 32.57 the prior day.  The VHSI index trades -12.7% below its 35.07 20-day moving average.
    • CBOE skew rose to 118.63, up +3.36% from 114.77 at the prior day’s close, and back inside 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 focus on September S&P/CaseShiller home price indexes at 9:00, followed by November consumer confidence at 10:00.
    Overseas news: Press reports suggest Standard & Poor’s will lower France’s credit rating outlook to negative in the coming days.  Today, Italy sold €7.5 billion of 3-, 7-, and 10-year debt, near the total amount targeted but at inverted yields all above 7.2%.  The European Banking Authority will delay publishing its banking stress test results until next week instead of this week.  Press reports indicate the U.K. will raise its tax on bank liabilities to 0.1% from 0.078%.  In November, Eurozone economic confidence fell to 93.7, below expectations and at the lowest level in two years. 
    Company news/ratings changes:
    ·         PNC – regulators said the company will not need to raise any common equity in its purchase of RBC’s U.S. branches, but the company will also not repurchase any common stock in 2011. 
    ·         ZION – downgraded to hold at Macquarie
     
    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 12.0x estimated 2011 earnings ($99.00) and 10.9x estimated 2012 earnings ($109.23), compared to 11.7x and 10.6 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 +4.6%, 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 1.16x tangible book value, and 10.3x and 8.9x 2011 and 2012 consensus earnings, respectively, compared to 1.11x tangible book value and 10.0x/8.7x 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 mixed.  Composite options markets are neutral, index options markets are bullish, and equity options markets are neutral to bearish.  The composite put/call ratio closed at 0.89, compared to 1.32 the prior day and below its 5- and 10-period moving averages of 1.10 and 1.13, respectively.  The index put/call ratio closed at 1.17, compared to 1.72 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 0.64, compared to 0.79 the prior day and below its 5- and 10-period moving averages of 0.70 and 0.74, respectively.   
    NYSE Indicators.  Equity markets rebounded strongly from oversold conditions, on better volume. Volume was 958.60 million shares, up +117.0% from 441.77 million shares Friday, 0.93x the 1.052 billion share 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +2,044 (compared to -385 the prior day), or 4.89:1.  Up volume led down volume by 36.6:1.
    SPX. On higher volume, the SPX rose +33.88 points, or +2.92%, to end at 1192.55.  Volume rose +119.97% over Friday’s half-day action to 739.26 million shares, up from 336.07 million shares Friday but below the 802.12 million share 50-day moving average. For the 74th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1205.68 vs. 1266.98, respectively).  The SPX closed above its 200-week moving average (1135.49) for the 36th straight session. 
    From its prior close at 1158.67, the SPX gapped +2.5% higher at the open to the 1188 level and rallied to the intra-day high of 1197.35 by 10:35.  Through 1:00, the index traded off, falling to the 1190 level.  Two small rallies at 1:30 and 2:15 to the 1194 level were sold.  The second sell-off continued through 3:15, with three sharper moves lower sending the index to 1184, giving back -1% of the day’s rally.  In trading’s final 15 minutes, the index rallied vertically to retake the 1190 level.
    Technical indicators are negative.  The market returned to a correction following mid-November’s reversal.  The SPX closed below 1300 for the 84th straight session and below 1200 for the fifth straight session.  The index closed below its April 2010 highs for the seventh 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 third straight session.  The SPX closed (by -2.91%) below its 20-day moving average (1228.29) for the eighth straight session.  The index closed (by -1.09%) below its 50-day moving average for the fifth straight session.  The index closed (by -2.02%) below its 100-day moving average (1217.11) for the seventh straight session.  The SPX closed -5.87% below its 200-day moving average, closing below that average for the 19th time in 20 sessions.  All moving averages fell.  The directional momentum indicator is negative for the seventh straight session, and the trend is weak and increasing.  Relative strength rose to 44.99 from 36.39, a neutral range.  Next resistance is at 1207.04; next support is at 1168.36.
    BKX.  On higher volume, the KBW bank index rose +0.95 points, or +2.72%, to end at 35.85, recording the 80th close below the prior 52-week low of 42.70 from August 25, 2010 and finishing below the 40-level for the 15th time in the last 16 sessions.  Volume rose +238.11% over Friday’s half day action to 131.286 million shares, up from 38.83 million shares Friday and above the 100.90 million share 50-day average.  The BKX closed -16.59% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -38.14% and -35.56% 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 34.90, the BKX gapped +2.8% higher at the open to 35.80 and rallied to its intra-day high of 36.35, up +4.15%, by 9:45.  Unlike the broader market, which rallied through 10:30 and held on to most of its gains through the afternoon, the BKX sold off through the day and steadily lost leadership within the SPX.  By 11:00, the BKX reached 35.85, and by 3:00 the index fell to 35.60 before setting the intra-day low of 35.42, only a +1.5% gain, at 3:45.  A short squeeze rally lifted the index +1.2% in trading’s final 10 minutes.  The index closed in the middle of the day’s range.  back to the 35.85 levelopened flat but with strong momentum. 
    Technical indicators are mostly negative.  Bank stocks are leading the market’s direction, which returned to correction following mid-November’s reversal.  The BKX closed below its 50-day moving average for the sixth straight session, 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 (37.66) crossed below the 100- and 200-day moving averages (39.48 and 45.02, respectively) on April 25th and June 16th.  The 20-day closed (by +0.47 points) above the 50-day for the 24th straight session, and the gap narrowed.  The 50-day moving average closed (by -7.36 points) below the 200-day moving average for the 118th straight session, but the gap narrowed.  The 100-day moving average closed (by -5.54 points) below the 200-day moving average for the 96th straight session, and the gap expanded.  The BKX closed (by -5.98%) below its 20-day moving average for the 13th time in 14 sessions.  The index closed (by -4.81%) below its 50-day moving average for the seventh straight session.  The index closed (by -9.20%) below the 100-day moving average for the 20th straight session and (by -20.36%) below its 200-day moving averages for the 125th consecutive session.  The index closed below 50.0 for the 125th straight session and below the 40.0 level for the 15th time in 16 sessions.  The directional movement indicator is negative for the 10th straight session, and the trend is weak and increasing.  Relative strength rose to 41.95 from 37.08, the lower end of a neutral range.  Next resistance is 36.33; next support at 35.40.
    Themes: financial stocks, macro-outlook, sx5e, dax, spx, dji, ccmp, nya, bkx, xlf, nky, hsi, shcomp, ftse Stocks: PNC, ZION, BAC
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