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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 Soar on Coordinated Central Bank Dollar Swap Actions 0 comments
    Nov 30, 2011 9:17 AM | about stocks: WFC, GS, BK, MS, BAC, JPM, C
    This morning.  Equity markets are in correction, with most major indexes below their 20-, 50-, 100-, and 200-day moving averages.  The DJI closed +0.13% above its 50-day moving average.  U.S. equity futures reversed earlier losses, and are significantly higher after China cut bank reserve requirements, world central banks cut dollar liquidity swap rates, and a much stronger than expected November ADP employment change report. Asian equity markets closed lower on increased volume.  European markets are higher and at their best levels of the day.  The dollar is much weaker, and the euro correspondingly stronger.  U.S. equity options markets suggest a neutral short-term outlook.   Commodities prices are mixed after positive economic developments and reports. U.S. Treasury yields are higher at the long end of the curve.  U.S. repo rates are lower again after a late week surge.  Overnight and 3-month LIBO remain elevated.  Euribor-OIS spreads are near 2011 highs.  After a fair value adjustment of -2.46 points, December SPX equity futures are at 1232.50, up +37.46 points.  The SPX opens at 1195.19, -12.4% below its April 29 multi-year 1363.61 closing high, -2.46% below its 20-day and -0.86% below its 50-day moving averages.  The SPX is -4.97% below its 1257.64 year-end close.  Next resistance is at 1201.97.  Next support is at 1190.10.
    Tuesday.  Equity markets closed mixed on unimpressive volume. The NYSE composite, DJI, and SPX, and DJI gained +0.41%, +0.28%, and +0.22%, respectively.  The Nasdaq reversed early gains and ended off -0.47%. Volume was lower. SPX market segments closed mixed. Leaders were oil and gas, utilities, and consumer goods, which closed up at least +0.77%.  Laggards were industrials, financials, and technology, which ended off at least -0.695.
    From its prior 1192.55 close, the SPX opened slightly lower, but rallied mid-morning to an intraday high of 1203.67. The rest of the day was a leisurely lower trend to support at 1195. A mild afternoon rally briefly carried the SPX back to an unsuccessful test of resistance at 1200, before fading into the close.
    Trading desk commentary seemed to anticipate new rescue operations to moderate liquidity issues at European banks and the Eurozone more generally. Financials were notable laggards. Traders reported little “high conviction” activity in either direction, with sentiment especially cautious regarding Europe and financials.
     

    In Asia,     on increased volume, equity markets closed lower, with greater weakness in China. News of the reduction in Chinese bank reserve requirements came after the market close.  In Tokyo, the NKY fell -0.51%. Volume rose +9.48%.  In Hong Kong, the Hang Seng fell -1.46%, on a +97.7% increase in volume.  The Shanghai composite fell -3.27% on a +34.3% increase in volume.  In Japan, commentary focused on S&P’s cut in international and U.S. bank credit ratings. In China, Eurozone weakness was an additional concern.
    In Japan, the NKY closed at 8,434.61, down from 8,477.82 at the prior close.  The NKY closed -1.16% below its 20-day moving average and down -17.5% for the year.  The index gapped lower to open at 8,407.63, traded sideways through mid-day, fell to an early afternoon intraday low of 8,361.69 and rallied through the day’s remainder to close just short of the 8,435.34 intraday high. Market segments were mixed. Leaders were utilities, consumer goods, and oil and gas, which closed up at least 0.27%. Financials lost -0.23%. Laggards were telecommunications, technology, and industrials, which lost at least -0.51%.
    In China, the Hang Seng Index closed at 17,989.35, down from 18,256.20 at the prior close.  The index open at 18,192.30 and traded lower through mid-day to an intraday low of 17,860.80 in early afternoon. The index rallied weakly through the remainder of the session. The index ended -4.74% and -3.03% below its respective 20-day and 50-day moving averages.  Among market segments, only consumer services rose, gaining +2.29%. Other leaders were telecommunications and industrials fell at least -0.49%. Laggards were financials, basic materials, and consumer goods, which lost at least 1.88%.
    In Shanghai, the SHCOMP closed at 2,333.41, down from 2,412.39 at the prior close.  The index opened at 2,406.33, and trended lower through the morning and mid-afternoon to an intraday low of 2,319.44. The index rallied weakly into the close. The SHCOMP closed -5.22% and -4.19% below its respective 20-day and 50-day moving averages.  All market segments closed up at least -2.38% lower. Leaders were financials, utilities, and telecommunications, which closed off at least -2.38%. Basic materials, consumer services, and technology lagged, closing at least -4.21% lower.
    In Europe, equities reversed early losses and rallied to moderate gains after news of China’s cut in bank reserve requirements. Indexes rallied to higher intraday highs after news that central banks cut dollar liquidity swap rates by 50 bps. Commentary focuses on these actions. The Euro Stoxx 50, FTSE, and DAX indexes are up +3.73%, +2.89%, and +4.31%, respectively.  Compared to the prior day’s 2,234.17 close, the Euro Stoxx 50 trades at 2,317.94, compared to the 2,203.52 intraday low.  All market segments are higher.  Leaders are basic materials, financials, and utilities, up at least +3.89%. Financials are up +4.81%, despite S&P’s rating cuts overnight. Laggards are oil and gas, telecommunications, and technology, which are up at least +2.20%.
    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 0.14500%, unchanged from 0.14500% Tuesday, but below the 0.25188% year-end level.  USD 3-month LIBOR rose to 0.52889%, the highest of the year, up from 0.52694% the prior day and compared to 0.30281% at year-end 2010.
    • The US Libor-OIS (LOIS) spread eased to 41.7 bps, from 42.8 bps, the year’s high, the prior day, and compares to 12.0 bps at the end of 2010.  Euribor-OIS rose to 98.4 bps, a new high, and compares to 96.6 bps Tuesday, and 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 10.0 bps Tuesday, down from 14.0 bps Monday, 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 2.004%, respectively, compared to 0.254% and 1.9991% Tuesday.  The yield curve widened to +1.750%, compared to +1.737% Tuesday.  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 reversed earlier gains and is presently weaker compared to the euro, yen, and pound.  The dollar trades at US$79.013, compared to US$79.007 the prior day, and above its US$77.665 50-day, US$76.294 100-day, and US$75.758 200-day averages.  The euro trades at US$1.3314, compared to US$1.3317 Tuesday and US$1.33320 the day prior.  The euro trades worse than its US$1.3619 50-day and US$1.3902 100-day averages.  In Japan, the dollar trades at ¥77.99, compared to ¥77.93 Tuesday and ¥77.98 the prior day.  The yen trades worse than its 50-day moving average ¥77.058.
    • Commodities prices are mostly lower, with mostly lower energy, precious metals, aluminum and copper, and agriculture prices.
    Volatility, Skew:
    • The VIX ended at 30.64, down -4.64% from 32.13 at the prior close.  The VIX is -4.69% below its 20-day moving average 32.15.
    • The Euro Stoxx 50 volatility index (V2X) is down -1.18% to 38.21 from 38.66 the prior day.  The V2X index trades -5.29% below its 40.31 20-day moving average, -15.8% below the 45.33 30-day high, and +35.0% above the 28.29 30-day low.
    • The Hang Seng volatility index (VHSI) rose +0.82% to 30.88 from 30.63 the prior day.  The VHSI index trades -11.4% below its 34.86 20-day moving average.
    • CBOE skew fell to 116.45, down -1.84% from 118.63 at the prior day’s close, and near the bottom of 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 October employment with the 8:15 release of the ADP employment change, followed at 8:30 with 3Q2011 final nonfarm productivity and unit labor costs. The ADP report showed private employment gains of +206K, up from revised 130K in October, and well above +130K survey.  At 9:45, the November Chicago purchasing manager report is released, followed at 10:00 by the NAPM-Milwaukee report.
    Overseas news: Today, the Federal Reserve, Bank of England, Bank of Japan, European Central Bank, Bank of Canada, and the Swiss National Bank announced a joint reduction in dollar swap liquidity rates to a 50 basis point spread over overnight index rates, down from a 100 basis point spread.  Today, the People’s Bank of China announced a reduction in bank reserve ratio requirements to 21.0% from 21.5%, effective December 5th and marking the first reduction since December 2008.  Last evening, European Finance Ministers reached an agreement on new powers for the Emergency Financial Stabilization Fund, with officials acknowledging the fund needs bolstering from either the IMF or the ECB to be effectively leveraged.  Last evening, European Union Monetary Affairs Commissioner Ollie Rehn said Europe only had 10 days to finalize an acceptable crisis response.  Yesterday and for the first time, the ECB failed to receive sufficient bids to fully sterilize its sovereign bond purchases.  In the third quarter, Canada’s GDP grew at a 3.5% annualized rate.  In October, Eurozone unemployment rose to 10.3%, above estimates of 10.2%, while the consumer price index held at 3.0%, in-line with estimates. 
    Company news/ratings changes:
    ·         WFC, BK, GS, MS, BAC, JPM, and C – long term credit ratings all downgraded one notch and given negative outlooks by Standard & Poor’s. 
     
    3Q2011 Earnings.  The third quarter’s earnings reports surprised expectations.  Of the 465 S&P500 companies that reported earnings to date, 73% (341 out of 465) 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 12.1x estimated 2011 earnings ($98.99) and 10.9x estimated 2012 earnings ($109.23), compared to 12.0x and 10.9 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 1.13x tangible book value, and 10.3x and 9.0x 2011 and 2012 consensus earnings, respectively, compared to 1.16x tangible book value and 10.3x/8.9x 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 +29.8% 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 to bearish.  The composite put/call ratio closed at 0.93, compared to 0.89 the prior day and below its 5- and 10-period moving averages of 1.07 and 1.11, respectively.  The index put/call ratio closed at 1.40, compared to 1.17 the prior day and below the 5- and 10-period moving averages of 1.52 and 1.51, respectively.  The equity put/call ratio closed the day at 0.61, compared to 0.64 the prior day and below its 5- and 10-period moving averages of 0.69 and 0.73, respectively.   
    NYSE Indicators.  Unimpressive volumes continued. Volume fell -4.19% to 918.43 million shares from 958.60 million shares Monday, 0.89x the 1.035 billion share 50-day moving average.  Market breadth was negative, and up volume lagged down volume.  Advancing stocks led decliners by -110 (compared to +2,044 the prior day), or 0.93:1.  Up volume lagged down volume by 0.98:1.
    SPX. On lower volume, the SPX rose +2.64 points, or +0.22%, to end at 1195.19.  Volume fell -12.39% to 647.68 million shares, down from 739.26 million shares Monday and below the 800.30 million share 50-day moving average. For the 75th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1205.51 vs. 1266.29, respectively).  The SPX closed above its 200-week moving average (1135.51) for the 37th straight session. 
    From its prior close at 1192.55, the SPX opened flat, giving back strong over night futures gains.  The index set the intra-day low of 1291.80, slightly in negative territory, at 9:35.  Through 10:25, the index rallied to the intra-day high of 1203.67.  Unable to move higher, the index fluctuated at the 1200 level through 1:00, when stocks began to lose strength.  By 2:00, the index fell to the 1194 level, still in positive territory.  A rally took the index back to 1201 by 3:15, but the index was sold into the close to finish with a modest gain at the lower end of the day’s range.
    Technical indicators are negative.  The market returned to a correction following mid-November’s reversal.  The SPX closed below 1300 for the 85th straight session and below 1200 for the sixth straight session.  The index closed below its April 2010 highs for the eighth 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 straight session.  The SPX closed (by -2.46%) below its 20-day moving average (1225.39) for the ninth straight session.  The index closed (by -0.86%) below its 50-day moving average for the sixth straight session.  The index closed (by -1.68%) below its 100-day moving average (1215.63) for the eighth straight session.  The SPX closed -5.61% below its 200-day moving average, closing below that average for the 20th time in 21 sessions.  All moving averages fell.  The directional momentum indicator is negative for the eighth straight session, and the trend is weak and stable. Relative strength rose to 45.60 from 44.99, a neutral range.  Next resistance is at 1201.97; next support is at 1190.10.
    BKX.  On lower volume, the KBW bank index fell -0.22 points, or -0.61%, to end at 35.63, recording the 81st close below the prior 52-week low of 42.70 from August 25, 2010 and finishing below the 40-level for the 16th time in the last 17 sessions.  Volume fell -35.29% to 84.95 million shares, down from 131.286 million shares Monday and below the 101.05 million share 50-day average.  The BKX closed -17.10% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -38.52% and -35.95% below its April 23, 2010, and February 14, 2011 respective closes.
    Financials underperformed the market, and large-cap banks performed in-line with regional banks.  From its prior close at 35.85, the BKX gapped lower to 35.70 and fell to the intra-day low of 35.41 at 9:38, down -1.25%.  Through 10:40, the index rallied, retaking its break-even line and reaching the intra-day high of 36.16.  The index struggled to hold the 36.00 level, and began a sell-off at 11:30 the retraced gains into negative territory by 12:30 and to the 35.50 level by 2:00.  A 3:00 rally reached the break-even line, but the index sold off into the close to finish with a loss and at the low 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 closed below its 50-day moving average for the seventh 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 (37.62) crossed below the 100- and 200-day moving averages (39.35 and 44.92, respectively) on April 25th and June 16th.  The 20-day closed (by +0.29 points) above the 50-day for the 25th straight session, and the gap narrowed.  The 50-day moving average closed (by -7.29 points) below the 200-day moving average for the 119th straight session, but the gap narrowed.  The 100-day moving average closed (by -5.56 points) below the 200-day moving average for the 97th straight session, and the gap expanded.  The BKX closed (by -6.01%) below its 20-day moving average for the 14th time in 15 sessions.  The index closed (by -5.29%) below its 50-day moving average for the eighth straight session.  The index closed (by -9.46%) below the 100-day moving average for the 21st straight session and (by -20.67%) below its 200-day moving averages for the 126th consecutive session.  The index closed below 50.0 for the 126th straight session and below the 40.0 level for the 16th time in 17 sessions.  The directional movement indicator is negative for the 11th straight session, and the trend is weak and increasing.  Relative strength fell to 41.15 from 41.95, the lower end of a neutral range.  Next resistance is 36.06; next support at 35.31.
    Themes: financial stocks, macro-outlook, sx5e, dax, spx, dji, ccmp, nya, bkx, xlf, nky, hsi, shcomp, ftse Stocks: WFC, GS, BK, MS, BAC, JPM, C
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