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Gary Townsend
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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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Listening to Markets
  • U.S. Futures Post Strong Rise on Positive Eurozone Developments 0 comments
    Dec 20, 2011 8:58 AM | about stocks: CIM, NLY, BAC, GS
    This morning.  U.S. equity markets are in correction.  All major indexes closed below their 200-day moving averages.  Also, the NYSE composite and Nasdaq closed below their respective 20-, 50-, and 100-day moving averages.  The SPX also closed below its 20- and 50-day moving averages.  The DJI closed above its 20-, 50-, and 100-day moving average.
    Overnight, Asian markets closed modestly mixed. European bourses are mixed, but moderately higher outside the United Kingdom. German business confidence surprised by improving for a 2nd consecutive month. Also, a Spanish bond auction went surprisingly well, and Italian bond yields continue to decline. In Britain, poor earnings guidance hurt equity indices, despite a stronger consumer confidence report. The dollar is weaker compared to the euro, yen, and British pound.  U.S. equity options markets suggest a neutral to bearish short-term outlook.  Commodities prices are mostly higher. U.S. Treasury yields are slightly higher, with the 10-year at 1.846%, up from 1.810% Monday.  U.S. repo rates are unchanged at 6 bps.  Overnight and 3-month LIBO remain elevated.  Euribor-OIS spreads are near 2011 highs.
    U.S. equity futures are significantly higher, and near their best pre-market levels, pointing to a possible short squeeze in today’s trade.  After a fair value adjustment of +0.50 points, March SPX equity futures are at 1215.90, up +16.40 points.  The SPX opens at 1205.35, -11.6% below its April 29 multi-year 1363.61 closing high, -1.22% and -1.99% below its respective 20- and 50-day moving averages.  The SPX is -4.16% below its 1257.64 year-end close.  Next resistance is at 1219.16.  Next support is at 1196.96.
    Monday.  As on last Thursday and Friday, U.S. equity markets opened higher, but without much buyer participation, and sellers quickly seized control, moving lower by 11:00, and moving sharply lower again in the final hour. The NYSE composite closed off -1.32%, followed by the Nasdaq, SPX, and DJI, which lost -1.26%, -1.17%, and -0.84%, respectively.  All market segments closed at least -0.28% lower.  Leaders were health care, consumer goods, and telecommunications. Laggards were oil and gas, financials, and basic materials,  which ended with losses of at least +1.61%. Trading volumes were light, just +0.80x the 50-day NYSE average.
    From its prior day 1219.66 close, the SPX rose to an early intraday high of 1224.57, but immediately dropped back to breakeven, signaling that any upward move would meet stiff resistance. Markets turned decisively lower by 11:00, as comments from ECB President Draghi offered nothing new that equity markets found encouraging. U.S. Treasury yields fell, risk came off, equity buyers stepped aside, and the SPX retreated to 1210 by mid-day. After trading back to 1215 at 2:00, the SPX took another sharp leg lower after 3:00, on no particular news, though the move corresponded with a move by BAC below $5/share. The SPX reach an intraday low of 1202.37 minutes before the close.

    Technically, developments were again discouraging, as indexes traded back to test support at their 100-day moving averages. Overhangs include Washington’s tax negotiations and S&P’s Eurozone sovereign downgrades, which could come at any time.
    In Asia, on lower volumes, Asian equity markets closed mixed.  In Tokyo, the NKY rose +0.49% on a -15.7% decrease in volume.  In Hong Kong, the Hang Seng rose +0.06%, on a -14.1% decrease in volume.  The Shanghai composite fell -0.10% on a -8.11% decrease in volume.  Commentary focused on improving U.S. economic data, yesterday’s Wall Street sell-off, and the death of Kim Jong Il.
    In Japan, the NKY closed at 8,336.48, up from 8,296.12 at the prior close.  The NKY closed -1.59% below its 20-day moving average, and down -18.5% for the year.  The index gapped up to open at 8,320.00, and rose to a mid-morning intraday high of 8,354.90, but subsequently chopped its way through the afternoon into the close.  Most market segments closed higher. Leaders were financials, industrials, and consumer services, which added at least +1.06%. Laggards were technology, telecommunications, and health care, which closed off at least -0.08%.
    In China, the Hang Seng Index closed at 18,080.20, up from 18,070.21 at the prior close.  The index opened at 18,050.00, but immediately spike to an intraday high of 18,270.70. The index quickly traded back to 18,150, where it traded through mid-afternoon, when renewed selling pressure renew pushed the index down to a late afternoon intraday low of 18,010.26. A final half-hour rally brought the index back to a modest closing gain. Volatility fell -2.74%.  The index ended -1.97% and -3.75% below its respective 20-day and 50-day moving averages.  Most market segments closed higher.  Leaders were oil and gas, industrials, and utilities, which gained at least +0.16%.  Financials added +0.15%. Laggards were basic materials, technology, and telecommunications, which closed off -0.43%.
    In Shanghai, the SHCOMP closed at 2,215.93, down from 2,218.24 at the prior close.  The index also opened lower, at the intraday low of 2,206.52, but rallied strongly to a mid-morning intraday high of 2,239.72. As in Hong Kong, the index sold off, and traded around the prior day’s closing level through the rest of the session. The SHCOMP closed -4.67% and -7.59% below its respective 20-day and 50-day moving averages.  Most market segments closed lower.  Leaders were telecommunications, oil and gas, and basic materials, which closed at least +0.07% higher.  Financials lost -0.06%.  Laggards were utilities, consumer services, and technology, which closed off at least -0.53%.
    In Europe, equity indexes are mixed.  The Euro Stoxx 50 and DAX are +0.79% and +0.68%, respectively, while the FTSE is -0.32% lower.  On the continent, commentary focuses on better than expected German confidence and Spanish debt auctions. In Britain, the FTSE is lower on weak earnings guidance from one drug maker, despite gains in November consumer confidence. Compared to the prior day’s 2,202.95 close, the Euro Stoxx 50 trades at 2,219.39, compared to a 2,232.68 intraday high.  The index is -1.17% and -2.85% below its respective 20- and 50-day moving averages.  Most market segments are higher.  Leaders are financials, industrials, and basic materials, which are at least +1.11% higher.  Laggards are technology and telecommunications, which are at least +0.06% higher, and health care, which is -0.06% lower.
    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%, unchanged from 0.15050% Monday, but below the 0.25188% year-end level.  USD 3-month LIBOR rose to 0.56975%, the highest of the year, up from 0.56695% the prior day and 0.30281% at year-end 2010.
    • The US Libor-OIS (LOIS) spread rose to 47.9 bps, the year’s high, up from 47.8 bps the prior day, and compares to 12.0 bps at the end of 2010.  Euribor-OIS rose to 95.2 bps, up from 94.0 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 6.0 bps, unchanged from 6.0 bps Monday, but well off from the August 2nd high of 33 bps.
    • U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.243% and 1.844%, respectively, compared to 0.234% and 1.810% Monday.  The yield curve widened to +1.601%, compared to +1.576% 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 weaker against the Euro, yen, and British pound.  The dollar trades at US$79.911, compared to US$80.250 the prior day, and above its US$77.921 50-day, US$76.973 100-day, and US$75.938 200-day averages.  The euro trades at US$1.3063, compared to US$1.2998 Monday and US$1.3046 the day prior.  The euro trades worse than its US$1.3553 50-day and US$1.3755 100-day averages.  In Japan, the dollar trades at ¥77.94, compared to ¥78.05 Monday and ¥77.76 the prior day.  The yen trades worse than its 50-day moving average ¥77.38.
    • Commodities prices are mostly higher, with higher energy and precious metals, lower aluminum and copper, and higher agriculture prices.
    Volatility, Skew:
    • The VIX ended at 24.92, up +2.59% from 24.29 at the prior close.  The VIX is -12.9% below its 20-day moving average 28.59.
    • The Euro Stoxx 50 volatility index (V2X) is down -2.30% to 30.29 from 30.99 the prior day.  The V2X index trades -19.0% below its 37.42 20-day moving average, -31.7% below the 44.34 30-day high, and +1.89% above the 29.73 30-day low.
    • The Hang Seng volatility index (VHSI) fell -4.11% to 27.08 from 28.24 the prior day.  The VHSI index trades -10.2% below its 30.15 20-day moving average.
    • CBOE skew fell -2.21% to 116.58 from 119.22 at the prior day’s close and within 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 reporting is limited to the November housing starts and building permits.  Housing starts rose to 685K, from 628K prior, up 9.3% and beating survey +1.1%.  Building permits were 681K up +5.7% from 653K prior and compared to -1.4% survey.
    Overseas news: In December, Germany’s Ifo business climate survey improved for the second straight month to 107.2, defying expectations of a decrease to 106.0 from 106.6 prior.  Today, two German economic institutes cut their 2012 German GDP forecasts but still at positive growth levels, indicating the country will avoid a recession.  Today, Spain sold €5.6 billion worth of 3- and 6-month bills, more than the €4.5 billion maximum target and at sharply lower yields than November’s auctions.  Today, the Japanese government increased the size of its foreign currency intervention fund by $385 billion, a further sign of the government’s determination to weaken its currency.  
    Company news/ratings changes:
    ·         NLY – declares quarterly dividend of $0.57 compared to $0.60 prior
    ·         CIM – declares quarterly dividend of $0.11 compared to $0.13 prior
    ·         GS – initiated at hold at Evercore
     
    3Q2011 Earnings.  The third quarter’s earnings reports surprised expectations.  Of the 481 S&P500 companies that reported earnings to date, 73% (352 out of 481) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +4.6% (versus a historical average of +2%).  EPS is up +15.0% 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 12.2x estimated 2011 earnings ($98.66) and 11.1x estimated 2012 earnings ($108.70), compared to 12.3x and 11.2 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 +4.3%, and +1.3%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.4% and +28.2%, respectively. 
    Large-cap banks trade at a median 1.19x tangible book value, and 10.8x and 9.2x 2011 and 2012 consensus earnings, respectively, compared to 1.21x tangible book value and 11.0x/9.4x 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 +29.5% and +53.8%, respectively.
    Options.  Options markets are neutral to bearish.  Composite options markets are neutral, index options markets are neutral to bullish, and equity options markets are bearish.  The composite put/call ratio closed at 0.86, compared to 1.20 the prior day and below its 5- and 10-period moving averages of 1.11 and 1.03, respectively.  The index put/call ratio closed at 1.21, compared to 1.36 the prior day and below the 5- and 10-period moving averages of 1.36 and 1.26, respectively.  The equity put/call ratio closed the day at 0.60, compared to 0.92 the prior day and below its 5- and 10-period moving averages of 0.81 and 0.76, respectively.   
    NYSE Indicators.  Markets declined moderately, but volume shrank -56.7% to 774.70 million shares, from 1.779 billion shares on Friday’s quadruple options expiration, only 0.80x the 963.36 million share 50-day moving average.  Market breadth was negative, and up volume lagged down volume, both by large margins.  Advancing stocks lagged decliners by -1,742 (compared to +721 the prior day), or 0.27:1.  Up volume lagged down volume by 0.10:1.
    SPX. On lower volume, the SPX fell -14.31 points, or -1.17%, to end at 1205.35.  Volume fell -59.04% to 571.39 million shares, down from Friday’s option-expiration inspired 1.395 billion shares and below the 739.41 million share 50-day moving average. For the 89th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1229.77 vs. 1260.37, respectively)The SPX closed above its 200-week moving average (1133.98) for the 51st straight session. 
    From its prior close at 1219.66, the SPX opened higher and rallied to the intra-day high of 1224.57 by 9:40.  Through 11:45, the index sold off, turning negative at 10:45 and reaching 1209 by 11:45.  The index attempted a rebound through 2:00, nearly retaking 1215.  Just after 3pm, the index sold off sharply, reaching 1205 by 3:30 and falling to the intra-day low of 1202.37 at 3:53.  The index closed just above the intra-day low and the 100-day moving average. 
    Technical indicators are mostly negative.  The market returned to a correction following mid-November’s reversal.  The SPX closed below 1300 for the 99th straight session but above 1200 for the 14th 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 below the 200-day average on September 7th and the spread is still widening.  The SPX closed (by -1.22%) below its 20-day moving average (1220.30) for the fourth straight session.  The index closed (by -1.99%) below its 50-day moving average for the fourth straight session.  The index closed (by +0.13%) above its 100-day moving average (1203.82) for the 14th straight session.  The SPX closed -4.37% below its 200-day moving average, closing below that average for the 34th time in 35 sessions.  The 50-day moving average rose.  The directional momentum indicator is negative for the sixth straight session, and the trend is weak and stable.  Relative strength fell to 44.28 from 47.79, a neutral range.  Next resistance is at 1219.16; next support is at 1196.96.
    BKX.  On lower volume, the KBW bank index fell -1.02 points, or -2.70%, to end at 36.69.  The index recorded its 95th straight close below the prior 52-week low of 42.70 from August 25, 2010 and finished below the 40-level for the 30th time in the last 31 sessions.  Volume fell -43.73% to 76.94 million shares, down from 136.74 million shares Friday and below the 93.58 million share 50-day average.  The BKX closed -14.63% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -36.69% and -34.05% 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 37.71, the BKX opened flat and sold off aggressively through 11:45, reaching 36.70 by that point, down -2.7%.  Through 2:00, the index attempted a rebound, and retook the 37.00 level by 1:50.  Positive momentum was not sustainable, and the index retraced below 37.00 by 2:15 and fell sharply just after 3pm to 36.60.  The intra-day low of 36.53 came at 3:35, and a small rebound at the bell lifted the index above its worst level but still at the bottom end of the day’s largely 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, most moving averages are falling, and the index is below each major moving average.  On December 16th, the 50-day average (38.32) crossed above the 100-day moving average (38.15) for the first time since April 25th.  The 50-day remains below the 200-day moving averages (43.86), as it has since June 16th.  The 20-day closed (by -0.87 points) below the 50-day for the 12th straight session, and the gap expanded.  The 50-day moving average closed (by -5.55 points) below the 200-day moving average for the 133rd straight session, but the gap narrowed.  The 100-day moving average closed (by -5.71 points) below the 200-day moving average for the 111th straight session, and the gap expanded.  The BKX closed (by -2.02%) above its 20-day moving average for the second time in the last four sessions.  The index closed (by -4.25%) below its 50-day moving average for the fifth straight session.  The index closed (by -3.83%) below the 100-day moving average for the seventh time in the last eight sessions.  The index closed (by -16.35%) below its 200-day moving averages for the 140th consecutive session.  The index closed below 50.0 for the 140th straight session and below the 40.0 level for the 30th time in 31 sessions.  The directional movement indicator switched back to negative for the first time in two sessions, and the trend is weak and decreasing.  Relative strength fell to 43.91 from 48.59, a neutral range.  Next resistance is 37.48; next support at 36.21.
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