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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 on Improving Asian PMIs 0 comments
    Jan 3, 2012 9:08 AM | about stocks: PACW, NLY
    Summary:   On the day, HTC lost -$138.1 thousand, or -0.42% after leverage adjustment.  We underperformed the SPX, but outperformed the XLF, BKX, and KRX.
    This morning.  U.S. equity markets are in a confirmed uptrend, which began on November 28th, when the SPX opened at 1158.67.  The SPX 50-day moving average has trended higher since October 13th, and closed above its 20-, 50-, and 100-day moving averages.  Friday’s losses pushed the SPX back below its 200-day moving average.  The Nasdaq and NYSE composite indexes closed -2.08% and -3.72% below their respective 200-day moving averages.  The Nasdaq also closed below its 50-day moving average.  Only the DJI closed above its 20-, 50-, 100-, and 200-day moving averages.  Overnight, Asian markets remained closed in Tokyo and Shanghai, but reopened strongly in Hong Kong after positive economic reports from China, India, and Australia.  European bourses are mixed, with greater strength in the United Kingdom and Germany.  The dollar is lower.  U.S. equity options markets suggest a bearish short-term outlook.  Commodities prices are higher.  U.S. Treasury yields are higher, with the 10-year at 1.946%, up from 1.876% on December 30th.  U.S. repo rates are unchanged at 15 bps.  There are still no indications that the ECB’s new bank lending facilities have eased interbank lending problems.  Overnight and 3-month LIBO remain elevated.  Euribor-OIS spreads are near 2011 highs.
    U.S. equity futures are significantly higher, though off their best levels of the morning.  After a fair value adjustment of +0.00 points, March SPX equity futures are at 1271.40, up +18.80 points.  The SPX opens at 1257.60, -7.77% below its April 29, 2011, multi-year 1363.61 closing high, +1.15% and +1.64% above its respective 20- and 50-day moving averages and -0.10% below its 200-day moving average.  The SPX ended 2010 off -0.003% below its 1257.64 year-end close.  Next resistance is at 1261.99.  Next support is at 1255.33.
    Friday.  Volumes rose and were holiday-light, but equity indexes closed lower with distributions on the SPX, DJI, and Nasdaq.  The NYSE composite lost -0.11%, followed by the Nasdaq, SPX, and DJI, which closed off -0.33%, -0.43%, and -0.57%, respectively.  Futures had indicated a modest gain.  Market breadth was negative, and up volume lagged down volume, but trading desks reported thin volume, liquidity, and attendance.  Economic news was light, with mixed December reports from the Kansas City Fed and NAPM-Milwaukee.  Market segments ended mostly lower.  Telecommunications rose +0.19%, while basic materials, and energy fell at least -0.16%.  Laggards were utilities, financials, and industrials, which fell at least -0.65%

    Since the uptrend confirmation on December 20th, distribution days number 2 on the Nasdaq and SPX and 1 on the DJI and NYSE composite.
    In Asia, equity markets were closed in Japan and Shanghai.  In Hong Kong, the Hang Seng Index rose +2.40% on a +14.9% increase in volume.  In 2011, the NKY, HSI, and SHCOMP indexes ended down -17.3%, -20.0%, and -21.7%, respectively, to levels comparable to March 2009.  Commentary focused on manufacturing data in India and China that indicated expansion, after contraction in November.  Over the weekend, Chinese December manufacturing and non-manufacturing PMI were 50.3 and 56.0, respectively, up from 49.0 and 49.7, respectively, in November.  Also, Australian output expanded for the first time in the past 6 months.
    In China, from the prior day’s 18,434.39 close, the Hang Seng Index gapped up to open at 18,770, and trended higher through the day, crossing 18,800 by mid-day and closing just short of the late afternoon 18,886.12 intraday high.   The HSI closed at 18,877.41, its best close since December 8th, and +1.57% and +0.50% above its respective 20- and 50-day moving averages.  All market segments closed at least +0.26% higher.  Leaders were oil and gas, basic materials, and consumer goods, which rose +3.13%, respectively.  Financials gained +2.31%.  Laggards were telecommunications, consumer services, and utilities.
    In Europe, equity indexes are mixed at mid-day and off their best levels of the day.  The Euro Stoxx 50 is down -0.41%, while the FTSE and DAX are up +0.96% and +0.70%, respectively.  Commentary focuses on positive Asian manufacturing and non-manufacturing PMI from China and India, and in anticipation of U.S. PMI later this morning.  Compared to the prior day’s 2,370.20 close, the Euro Stoxx 50 trades at 2,361.10, compared to a 2,381.75 intraday high and low and 2,358.13 intraday low.  The index is +0.67%  and +0.85% above its respective 20- and 50-day moving averages.  Market segments are mixed.  Leaders are industrials, basic materials, and technology, which are up at least +0.50%.  Financials are off -0.51%.  Health care, utilities, and consumer services lag with losses of at least -1.41%.
    Libor, LOIS, Currencies, Treasuries, Commodities:
    • Interbank lending rates continue to reflect substantial stress, centered on the health and liquidity of Eurozone banks in the current economic environment.   USD LIBOR eased to 0.14900% from 0.15400% the prior day, but below the 0.25188% year-end 2010 level.  USD 3-month LIBOR is 0.58250%, a new high, from 0.58100% the prior day and 0.30281% at year-end 2010.
    • The US Libor-OIS (LOIS) spread rose to 49.55 bps, up from 49.40 bps the prior day, and compares to 12.0 bps at the end of 2010.  Euribor-OIS eased to 94.12 bps, from 95.30 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 15.0 bps, unchanged from 15.0 bps Friday, and well off from the August 2nd high of 33 bps.
    • U.S. Treasury yields are higher across the curve, with 2- and 10-year maturities yielding 0.251% and 1.947%, respectively, compared to 0.239% and 1.876% Friday.  The yield curve narrowed to +1.696%, compared to +1.637% 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, Japanese yen, and British pound.  The dollar trades at US$79.713, compared to an intraday low of $79.614 and US$80.280 at the prior day’s close, and above its US$78.585 50-day, US$77.531 100-day, and US$76.145 200-day averages.  The euro trades at US$1.3035 compared an intraday high of US$1.3059 and US$1.2934 Friday and US$1.2961 the day prior.  The euro trades worse than its US$1.3391 50-day and US$1.3628 100-day averages.  In Japan, the dollar trades at ¥76.72, compared to ¥76.90 Friday and ¥76.91 the prior day.  The yen trades better than its 50-day moving average ¥77.56.
    • Commodities prices are higher, with higher energy, precious metals, aluminum and copper, and agriculture prices.
    Volatility, Skew:
    • The VIX ended at 23.40, up +3.31% from 22.65 at the prior close.  The VIX is -6.14% below its 20-day moving average 24.93.
    • The Euro Stoxx 50 volatility index (V2X) is down -0.05% to 31.29 from 31.30 the prior day.  The V2X index trades -16.4% below its 37.42 20-day moving average, -26.8% below the 42.74 30-day high, and +10.4% above the 28.35 30-day low.
    • The Hang Seng volatility index (VHSI) is at 24.92, up +1.22% from 24.62 the prior day.  The VHSI index trades -8.58% below its 27.26 20-day moving average.
    • CBOE skew fell -0.31% to 116.21, from 116.57 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.  At 10:00, economic reports are November construction spending (survey +0.4%, prior +0.8%) and December ISM manufacturing and prices paid (survey 53.4 and prior 52.7, survey +48.0 and prior 45.0, respectively). 
    Overseas news: Global purchasing manager indexes for December increased and beat expectations, as China’s PMI returned above the expansionary 50-level threshold, while India, Germany, and U.K. all increased over November and surprised positively.  This weekend, Italian Treasury said it would start penalizing primary dealers who fail to bid regularly at debt auctions.  In 2011, Italy’s deficit came in at -€61.5 billion, lower than expectations of -€64.8 billion. 
    Company news/ratings changes:
    • PACW – upgraded to outperform at KBW, $22 price target.
    • NLY – downgraded to outperform from Top Pick at RBC
     
    3Q2011 Earnings.  The third quarter’s earnings reports surprised expectations.  Of the 492 S&P500 companies that reported earnings to date, 73% (357 out of 492) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +4.4% (versus a historical average of +2%).  EPS is up +14.7% 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 12.7x estimated 2011 earnings ($98.79) and 11.6x estimated 2012 earnings ($108.70), compared to 12.7x and 11.5 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 +4.4%, and +1.3%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.5% and +28.2%, respectively. 
    Large-cap banks trade at a median 1.25x tangible book value, and 11.6x and 10.0x 2011 and 2012 consensus earnings, respectively, compared to 1.26x tangible book value and 11.6x/10.1x 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 +33.1% and +53.8%, respectively.
    Options.  Options markets are bearish.  Composite options markets are neutral, index options markets are neutral to bearish, and equity options markets are bearish.  The composite put/call ratio closed at 0.85, compared to 1.09 the prior day and below its 5- and 10-period moving averages of 0.93 and 0.96, respectively.  The index put/call ratio closed at 1.23, compared to 1.51 the prior day, and below the 5- and 10-period moving averages of 1.29 and 1.30, respectively.  The equity put/call ratio closed the day at 0.58, compared to 0.72 the prior day and below its 5- and 10-period moving averages of 0.67 and 0.68, respectively.
    NYSE Indicators.  Volume rose +10.6% to 588.05 million shares, from 531.68 million shares Thursday.  Market breadth was slightly negative, and up volume lagged down volume.  Advancing stocks lagged decliners by -154 (compared to +1,739 the prior day), or 0.90:1.  Up volume lagged down volume by 0.66:1.
    SPX. On higher volume, the SPX fell -5.42 points, or -0.43%, to end at 1257.60.  Volume rose +12.78% to 423.25 million shares, up from 375.28 million shares Thursday but below the 704.22 million share 50-day moving average.  For the 6th consecutive day, the SPX closed above its 50-day moving average (1,237.33), but -0.10% below the 200-day moving average (1,258.82) for the 2nd time in the past 3 days.  For the 98th straight session, the SPX’s 50-day moving average closed below its 200-day moving average.  The SPX closed above its 200-week moving average (1133.92) for the 59th straight session.
    From its prior close at 1,263.02, the SPX opened weaker to the 1261 level, but rebounded to breakeven at 10:00 and set the intra-day high of 1264.12 five minutes later.  The market retraced to the 1261 level by noon and traded sideways through 2:15.  A small sell-off sent the index lower to 1258 by 2:25.  Through 3:30, the index regained the 1261 level before a second sell-off into the bell closed the index at its intra-day low. 
    The SPX re-crossed below its 200-day moving average.  The SPX closed below 1300 for the 106th straight session, but above 1200 for the 21st 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.  After peaking on June 6th at 1317.97, the 100-day moving average crossed below the 200-day average on September 7th.  On December 22nd, the 100-day set a low at 1202.28, and began an upward trend.  For the 8th straight session, the SPX closed (by +1.15%) above its 20-day moving average (1243.26).  The index closed (by +1.64%)above its 50-day moving average for the 8th straight session.  The index closed (by +4.25%) above its 100-day moving average (1206.37) for the 22nd straight session.  The SPX closed -0.10% below its 200-day moving average for the 2nd time in the past 3 sessions.  The 20-, 50-, and 100-day moving averages rose.  The directional momentum indicator was positive for the 7th straight session, but the trend is weak.  Relative strength fell to 55.51 from 57.26, in the middle of a neutral range.  Next resistance is at 1261.99; next support is at 1255.33.
    BKX.  On higher volume, the KBW bank index fell -0.32 points, or -0.81%, to end at 39.38.  The index recorded its 103rd straight close below its 2010 low and finished below the 40-level for the 38th time in the past 39 sessions.  Volume rose +5.64% to 49.17 million shares, up from 46.54 million shares Thursday but below the 87.21 million share 50-day average.  The BKX closed -8.38% below its August 30, 2010, closing low of 42.98, the trough of the last year’s correction, and -32.04% and -29.21% below its April 23, 2010 (the post-2008 high point), and February 14, 2011 (the most recent high point) respective closes.
    Financials underperformed the market, and regional banks underperformed large cap names.  From its prior close of 39.70, the BKX opened lower to 39.55 and set the intra-day high of 39.59 at 10:05.  By 10:30, the index fell to 39.40 and found support there.  A rally to 39.50 by 1:45 was sold at 2:15 to the intra-day low of 39.35 at 2:20.  A stronger rally back to just shy of the intra-day high by 3:30 was also sold into the close, and the index finished just above the day’s low. 
    Technical indicators are mixed, but improving.  Bank stocks have lagged the market’s overall rebound from the October lows.  Moving averages alignment is mixed, as the 20- and 50-day moving averages (38.67 and 38.54, respectively) have crossed above the 100-day moving average (37.88).  The 20- and 50-day moving averages are trending higher.  The 100-day moving average appears to have troughed, through the 200-day moving average (43.35) continues to trend lower.  On December 16th, the 50-day average crossed above the 100-day moving average for the first time since April 25th.  The 50-day remains below the 200-day moving average, as it has since June 16th.  For the 3rd time in the past 4 days, the 20-day closed (by +0.13 points) above the 50-day.  The 50-day moving average closed (by -4.81 points) below the 200-day moving average for the 141st straight session, but the gap continues to narrow.  The 100-day moving average closed (by -5.47 points) below the 200-day moving average for the 119th straight session, but the gap is narrowing.  The BKX closed (by +1.84%) above its 20-day moving average for the 10th time in the last 11 sessions.  The index closed (by +2.18%) above its 50-day moving average for the 6th straight session.  The index closed (by +3.97%) above the 100-day moving average for the 7th straight session.  The index closed (by -9.16%) below its 200-day moving average for the 147th consecutive session.  The index closed below 50.0 for the 148th straight session and below the 40.0 level for the 38th time in the past 39 sessions.  The directional movement indicator was positive for the 5th consecutive session, but the trend is weak.  Relative strength fell to 54.69 from 56.51, in the middle of a neutral range.  Next resistance is 39.53; next support at 39.29.
    Stocks: PACW, NLY
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