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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 Modestly Higher As German Optimism, Spanish Debt Provide Relief 0 comments
    Dec 13, 2011 9:16 AM | about stocks: NLY
    This morning.  U.S. equity markets are in correction. All major indexes closed above 20-, 50-, and 100-day moving averages. Only the DJI closed above its 200-day moving average.
    U.S. equity futures are moderately higher, benefiting from stronger European equities, which reversed positively on better than expected German business optimism and a surprisingly strong Spanish sovereign debt auction. The dollar is slightly weaker compared to the euro, yen, and pound.  U.S. equity options markets suggest a mixed short-term outlook.  Commodities prices are mixed.  U.S. Treasury yields are slightly higher, with the 10-year at 2.045%, up from 2.012% Monday.  U.S. repo rates edged up to 10 bps.  Overnight and 3-month LIBO remain elevated.  Euribor-OIS spreads are near 2011 highs.  After a fair value adjustment of +1.07 points, March SPX equity futures are at 1237.70, up +7.33 points.  The SPX opens at 1236.47, -9.32% below its April 29 multi-year 1363.61 closing high, +0.91% above its 20-day and +1.19% above its 50-day moving averages.  The SPX is -1.68% below its 1257.64 year-end close.  Next resistance is at 1251.93.  Next support is at 1224.13.
    The Telegraph’s  (Merkel's Teutonic Summit) “misguided and contractionary” take is one of the more cogent, describing an “austerity union” but not remotely a fiscal union.  The article cites one game changer, by which the ECB will extend unlimited credit to the Eurozone’s €23 trillion banking system, having the reserve ratio to 1% and relaxing collateral rules, supporting a “rebuild” of the “shattered” banking system by allowing a “carry trade” by which banks borrow at 1% to buy Italian debt at 6.4%.
    Monday.  U.S. equity markets closed lower, disappointing investors anticipating a year-end rally, as European markets found little cheer in last week’s Eurozone “Leaders’ Accord”. None of the ratings agencies were impressed by the agreement, which promised more process and bureaucracy than wherewithal to address Europe’s chronic sovereign insolvencies. S&P may lower its ratings on AAA-rated Eurozone countries as early as this week. All major indexes posted losses of at least -1.31%, though less than the prior Friday’s gains. The Nasdaq lost least, followed by the DJI, SPX, and NYSE composite, which lost -1.34%, -1.49%, and -1.86%, respectively. 
    Trading volumes were light, just 0.79x the 50-day NYSE average. From its prior day 1255.19 close, the SPX gapped lower to open at the 1240 level and trended lower through the 11:30 European market close to an intraday low of 1227.25. The SPX subsequently traded within a narrow range until 3:00, and then rallied into the close. Market breadth was negative.  All market segments closed at least -0.27% lower.  Leaders were consumer services, telecommunications, and consumer goods. Laggards were oil and gas, financials, and basic materials, which closed off at least -2.31%.
    Technically, the SPX close above 1230 and 1235 was a positive (50% retracement, 38% Fibonacci retracement, respectively); also, volatility fell sharply in the final half hour to close down -2.69% on the day. Trading desks reported disappointment that the accord already seems inadequate to placate risk, even through the end of the year. A prospective S&P downgrade of several sovereigns looms and the benefit of bank liquidity measures will see their first test on December 21st, when a 3-year tender is offered. Profit warnings have added to risk aversion.

    In Asia,
    on mixed volumes, Asian equity markets closed moderately lower.  In Tokyo, the NKY fell -1.17% but closed off its worst levels.  Volume rose +11.9%.  In Hong Kong, the Hang Seng fell -0.69%, on a -10.3% decrease in volume.  The Shanghai composite fell -1.87% on a +52.7% increase in volume and closed near its intraday low.  Commentary focused on the European concerns, including negative credit outlooks from Moody’s and Fitch, the Chinese housing slump, and a weaker Intel sales forecast, released yesterday, stemming from parts shortages due to recent Thai floods.
    In Japan, the NKY closed at 8,552.81, up from 8,653.82 at the prior close.  The NKY closed +0.77% above its 20-day moving average, but down -16.4% for the year.  The index opened at 8,535.52, and traded within a narrow range through the morning session, then rallied to an intraday high of 8,594.32 in mid-afternoon before weakening into the close. Most market segments closed lower.  Health care managed a 0.11% gain. Other leaders were telecommunications and utilities, which closed off at least -0.28%. Financials lost -0.66%. Laggards were consumer goods, basic materials, and industrials, which closed off at least -0.39%.
    In China, the Hang Seng Index closed at 18,447.17, down from 18,575.66 at the prior close.  The index gapped lower to open at 18,327.40, and traded immediately to an intraday low of 18,297.70, and then trended higher through the day to end just below the 18,465.40 intraday high. Volatility fell -5.49%.  The index ended -0.70% and -1.22% below its respective 20-day and 50-day moving averages.  Most market segments closed lower.  The exception was technology, which rose +2.13% despite Intel’s news. Other leaders were basic materials and consumer goods, which closed at least -0.36% lower.  Laggards were telecommunications, financials, and consumer services, which lost at least -0.78%.
    In Shanghai, the SHCOMP closed at 2,248.59, down from 2,291.55 at the prior close.  The index opened at 2,283.22, and trended lower to a late afternoon 2245.87 intraday low.  The SHCOMP closed -5.68% and -6.83% below its respective 20-day and 50-day moving averages.  All market segments closed at least -0.28% lower.  Leaders were oil and gas, telecommunications, and financials, which closed at least -0.28%. Laggards were consumer goods, basic materials, and technology, which closed at least -3.07% lower.
    In Europe, equities opened higher, reversed lower, and then reversed modestly higher. Commentary focuses on better than expected German business confidence and a surprisingly successful Spanish sovereign debt sale. The Euro Stoxx 50, FTSE, and DAX are up +0.43%, +0.79%, and +0.68%, respectively.  Compared to the prior day’s 2,269.46 close, the Euro Stoxx 50 trades at 2,282.83, off the intraday high of 2,289.22.  The index is +1.39% and -0.20% above its respective 20- and 50-day moving averages.  Most market segments are higher.  Leaders are technology, industrials, and basic materials, which are up at least +1.49%. Laggards are financials and utilities, which are down at least -0.15%.
    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 0.15050%, up from 0.15000% Monday, but below the 0.25188% year-end level.  USD 3-month LIBOR rose to 0.54625%, the highest of the year, up from 0.54350% the prior day and 0.30281% at year-end 2010.
    • The US Libor-OIS (LOIS) spread rose to 45.7 bps, the year’s high, up from 45.2 bps the prior day, and compares to 12.0 bps at the end of 2010.  Euribor-OIS rose to 95.1 bps from 94.6 bps Monday, 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 is 10.0 bps, unchanged from 10.0 bps Monday, but well off from the August 2nd high of 33 bps.
    • U.S. Treasury yields are higher at the long end of the curve, with 2- and 10-year maturities yielding 0.222% and 2.031%, respectively, compared to 0.222% and 2.012% Monday.  The yield curve narrowed to +1.809%, compared to +1.790% 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, yen, and pound.  The dollar trades at US$79.397, compared to US$79.534 the prior day, and above its US$77.704 50-day, US$76.661 100-day, and US$75.844 200-day averages.  The euro trades at US$1.3192, compared to US$1.3187 Monday and US$1.3386 the day prior day.  The euro trades worse than its US$1.3603 50-day and US$1.3821 100-day averages.  In Japan, the dollar trades at ¥77.83, compared to ¥77.94 Monday and ¥77.65 the prior day.  The yen trades worse than its 50-day moving average ¥77.251.
    • Commodities prices are mixed, with higher energy, lower precious metals, aluminum, and copper, and higher agriculture prices.
    Volatility, Skew:
    • The VIX ended at 25.67, down -2.69% from 26.38 at the prior close.  The VIX is -15.6% below its 20-day moving average 30.42.
    • The Euro Stoxx 50 volatility index (V2X) is down -6.13% to 34.04 from 36.25 the prior day.  The V2X index trades -11.0% below its 38.28 20-day moving average, -23.7% below the 44.69 30-day high, and +0.27% above the 33.99 30-day low.
    • The Hang Seng volatility index (VHSI) fell -3.97% to 28.78 from 29.97 the prior day.  The VHSI index trades -10.5% below its 32.15 20-day moving average.
    • CBOE skew rose +2.94% to 120.26, from 116.83 at the prior day’s close and just above the top 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 focus will be on the last FOMC meeting of 2011, a one-day meeting.  A press release will issue at 2:15.  No change in policy is expected. There is no press conference.  Economic reporting picks up with the November NFIB small business optimism report at 7:30, followed at 8:30 by November advance retail sales, and at 10:00 by the December IBD/TIPP economic optimism report, October JOLTS job openings and October business inventories. NFIB confidence rose to 92.0, from 90.2 prior and beating survey of 91.5. Advance retail sales disappointed with a gain of +0.2%, compared to survey +0.4% and prior revised +0.6%.
    Overseas news: Today, Spain sold €4.94 billion worth of 12- and 18-month bills, more than the €4.25 billion targeted and at lower yields than the prior auctions.  In December, the German ZEW economic expectations survey unexpectedly rose, improving to -53.8 compared to -55.8 survey and November’s -55.2 reading. 
    Company news/ratings changes:
    ·         NLY – initiated at neutral at Nomura, $16.50 price target
     
    3Q2011 Earnings.  The third quarter’s earnings reports surprised expectations.  Of the 473 S&P500 companies that reported earnings to date, 73% (345 out of 473) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +4.5% (versus a historical average of +2%).  EPS is up +14.8% 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 12.5x estimated 2011 earnings ($99.04) and 11.4x estimated 2012 earnings ($108.92), compared to 12.7x and 11.5 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 +4.7%, and +1.5%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.9% and +28.5%, respectively. 
    Large-cap banks trade at a median 1.20x tangible book value, and 10.9x and 9.4x 2011 and 2012 consensus earnings, respectively, compared to 1.23x tangible book value and 11.1x/9.6x 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 +30.2% and +53.8%, respectively.
    Options.  Options markets are mixed.  Composite options markets are bullish, index options markets are neutral, and equity options markets are bearish.  The composite put/call ratio closed at 0.88, compared to 1.19 the prior day and below its 5- and 10-period moving averages of 0.95 and 0.95, respectively.  The index put/call ratio closed at 1.19, compared to 1.54 the prior day and in between the 5- and 10-period moving averages of 1.16 and 1.22, respectively.  The equity put/call ratio closed the day at 0.62, compared to 0.71 the prior day and below its 5- and 10-period moving averages of 0.72 and 0.67, respectively.   
    NYSE Indicators.  Volume fell -5.06% to 777.79 million shares, down from 819.22 million shares Friday, 0.79x the 987.94 million share 50-day moving average.  Market breadth was negative, and up volume lagged down volume.  Advancing stocks lagged decliners by -1867 (compared to +2,150 the prior day), or 0.24:1.  Up volume lagged down volume by 0.11:1.
    SPX. On higher but still-depressed volume, the SPX fell -18.72 points, or -1.49%, to end at 1236.47.  Volume rose +0.51% to 611.05 million shares, up from 607.95 million shares Friday but below the 758.57 million share 50-day moving average. For the 84th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1221.95 vs. 1262.87, respectively)The SPX closed above its 200-week moving average (1135.80) for the 46th straight session. 
    From its prior close at 1255.19, the SPX gapped lower at the open to the 1245 level, setting the intra-day high, and continued falling through noon to the intra-day low of 1227.25.  The index traded sideways through 3:25 at the 1230 level.  A small rally lifted the index into the bell to close above 1235 but still at the lower end of the day’s negative range. 
    Technical indicators are mostly negative.  The market returned to a correction following mid-November’s reversal.  The SPX closed below 1300 for the 94th straight session but above 1200 for the ninth straight session.  The index closed above its April 2010 highs for the ninth straight session.  The 50-day moving average crossed above the 100-day moving average on December 6th, having been below that average since July 11th.  The 100-day moving average crossed the 200-day average to the downside on September 7th and the spread is still widening.  The SPX closed (by +0.91%) above its 20-day moving average (1225.30) for the ninth straight session.  The index closed (by +1.19%) above its 50-day moving average for the ninth straight session.  The index closed (by +2.25%) above its 100-day moving average (1209.23) for the ninth straight session.  The SPX closed -2.09% below its 200-day moving average, closing below that average for the 29th time in 30 sessions.  The 50-day moving average rose.  The directional momentum indicator switched to negative for the first time in nine sessions, and the trend is weak and declining.  Relative strength fell to 51.32 from 56.00, a neutral range.  Next resistance is at 1251.93; next support is at 1224.13.
    BKX.  On lower volume, the KBW bank index fell -0.96 points, or -2.45%, to end at 38.17.  The index recorded its 90th straight close below the prior 52-week low of 42.70 from August 25, 2010 and finished below the 40-level for the 25th time in the last 26 sessions.  Volume fell -13.63% to 66.03 million shares, down from 76.45 million shares Friday and below the 96.82 million share 50-day average.  The BKX closed -11.19% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -34.13% and -31.39% 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 39.13, the BKX gapped lower to 38.67, immediately setting the intra-day high.  Through noon, the index fell to the intra-day low of 37.82.  In the afternoon, the index attempted two rebounds to the 38.20 level, but both were unable to move above that level.  The index closed just below 38.20 and at the lower end of the day’s negative range.   
    Technical indicators are mostly negativeBank stocks are leading the market’s direction, which returned to correction following mid-November’s reversal.  Moving averages align bearishly, as most shorter duration averages are below the longer duration averages and some moving averages are falling.  The 50-day average (38.12) crossed below the 100- and 200-day moving averages (38.64 and 44.24, respectively) on April 25th and June 16th.  The 20-day closed (by -0.51 points) below the 50-day for the seventh straight session, and the gap expanded. The 50-day moving average closed (by -6.12 points) below the 200-day moving average for the 128th straight session, but the gap narrowed.  The 100-day moving average closed (by -5.60 points) below the 200-day moving average for the 106th straight session, and the gap expanded.  The BKX closed (by +1.49%) above its 20-day moving average for the ninth straight session.  The index closed (by +0.13%) above its 50-day moving average for the ninth straight session.  The index closed (by -1.21%) below the 100-day moving average for the second time in three sessions.  The index closed (by -13.72%) below its 200-day moving averages for the 135th consecutive session.  The index closed below 50.0 for the 135th straight session and below the 40.0 level for the 25th time in 26 sessions.  The directional movement indicator is positive for the ninth straight session, and the trend is weak and stable.  Relative strength fell to 50.18 from 54.32, a neutral range.  Next resistance is 38.81; next support at 37.68.
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