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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 Modestly Lower as JPM Initiates 4Q2011 Earnings Season 0 comments
    Jan 13, 2012 8:42 AM | about stocks: RF, SBNY, SIVB, JPM
    This morning.  U.S. equity markets are in a confirmed uptrend.  The uptrend began on November 28th, when the SPX opened at 1158.67, but the SPX 50-day moving average has trended higher since October 13th.  The SPX, DJI, and Nasdaq closed well above their respective 20-, 50-, 100-, and 200-day moving averages.  The NYSE composite indexes closed -0.77% below its 200-day moving average.  Overnight, Asian equity markets closed mixed, with greater strength in Tokyo.  European exchanges are moderately higher, led by financials, after another successful Italian sovereign debt auction. The dollar is mixed, slightly stronger against the euro.  U.S. equity options markets suggest a neutral to bearish short-term outlook.  Commodities prices are mixed.  U.S. Treasury yields are lower, with the 10-year at 1.897%, down from 1.923% the prior day.  U.S. repo rates are at 11 bps.
    There are indications that the ECB’s new bank lending facilities have begun to ease interbank lending problems.  Overnight and 3-month LIBO remain elevated, and Euribor-OIS spreads remain near 2011 highs, but are trending lower.  Also, the 3-month Euro basis swap is now at its best levels since August 31st
    U.S. equity futures are modestly lower, and well off earlier pre-market highs.  After a fair value adjustment of -0.55 points, March SPX equity futures are at 1287.50, down -3.65 points.  The SPX opens at 1295.50, -4.99% below its April 29, 2011, multi-year 1363.61 closing high, but +2.95% and +4.24% above its respective 20- and 50-day moving averages and +6.55% and +2.97% above its respective 100- and 200-day moving averages.  Next resistance is at 1299.62.  Next support is at 1288.57.
    Thursday.  As on the prior day, markets moved lower after the open, with weaker than expected December advance retail sales ruling the early trade, but indexes reversed with the European close and moved higher through the session’s remainder to close just off the late-session intraday high. The Nasdaq rose +0.51%, followed by the NYSE composite, SPX, and DJI, which rose +0.25%, +0.23%, and +0.17%, respectively. Most market segments closed higher. Leaders were basic materials, industrials, and financials, which rose at least +0.48%. Laggards were consumer goods, (up +0.13%) and utilities and oil and gas, which closed off at least -0.16%. All indexes closed above their 20-, 50-, and 100-day moving averages, and only the NYSE composite closed below its 200-day moving average.  Market breadth was positive.  Volumes rose, but remained below the 50-day moving average, another indication that participation remains light and many investors remain sidelined. Volatility rose through mid-morning, but the VIX peaked at 22.03 and trended lower through the day to end at 20.47, the intraday low and the lowest close since July. 
    Trading desks report that early selling pressure was never intense, and that activity levels remained relatively low, as hedge and mutual fund participation remains muted.  Technicals improved. At 1295.50, the SPX closed above the October 27th intraday high of 1292.66.  Support is seen at 1280-83, the prior week highs, and 1278, last week’s close, and 1258, the 200-day moving average. Resistance is 1312. Sentiment is improving, but investors remain cautious.  While the U.S. economy is improving, markets appear to need further assurance that ECB actions have contained Eurozone sovereign problems and that China’s economy will and softly.  Hedge fund and mutual fund participation remains muted.

    Distribution days number 2 on the Nasdaq, SPX, and BKX, and 1 on the DJI and NYSE composite.
    In Asia, equity markets closed mixed, with moderate strength in both Tokyo and Hong Kong. Volumes were mixed. In Japan, the NKY closed up +1.36% on a +13.0% increase in volume.  In Hong Kong, the HSI rose 0.57% on a +12.6% increase in volume.  In Shanghai, the SHCOMP declined -1.34% on a -0.14% decrease in volume.  After a poor 2011, these indexes are at levels comparable to March 2009 and well below their 200-day moving averages.  Commentary focused on views that Europe’s debt crisis is easing.
    In Japan, the NKY closed Friday at 8,500.02, compared to 8,385.59 the prior day.  The index closed +0.66% above and -0.33% below its respective 20- and 50-day moving averages.  The index gapped up to open at 8,470, and first tested resistance at 8,500 by mid-morning. By mid-day, the index had retreated to 8,465, but rallied through the afternoon to a late-session intraday high of 8,509.76 before fading at the close.  All market segments closed at least +0.06% higher.  Leaders were basic materials, technology, and consumer goods, which closed up at least +1.77%. Financials, telecommunications, and utilities lagged.
    In China, the Hang Seng closed at 19,204.42, up from 19,0905.38 at the prior day’s close.  The index gapped up to open at 19,232.21, its intraday high, but struggled through the morning to hold those gains, trading to an intraday low of 19,073.18 at mid-day. The afternoon session saw a reversal, with a positive trend through the close. The index closed +3.48% and +2.38% above its respective 20- and 50-day moving averages.  Market segments closed mixed.  Leaders were technology, consumer services, and financials, which closed up at least +0.96%. Laggards were utilities, consumer goods, and telecommunications, which closed down at least -0.52%. In Shanghai, the SHCOMP closed at 2,244.58, down from 2,275.01 the prior day.  The SHCOMP closed +1.81% above and -3.74% below its respective 20- and 50-day moving averages.  As in Hong Kong, the 2,281.47 intraday high came at the open, and the index trended lower to a 2,225.83 intraday low just after mid-session. The index rallied back to 2,260 in the final hour, but lost ground into the close. Most market segments closed lower.  Leaders were oil and gas (up +0.78%) and financials and basic materials, which closed off at least -0.64%. Laggards were consumer services, health care, and technology, which closed down at least -3.52%.
    In Europe, equity indexes are moderately higher, led by the financials, after a reasonably strong Italian sovereign 3-year debt auction. The Euro Stoxx 50, FTSE 100, and DAX are up +0.89%, +0.18%, and +0.53%, respectively.  Compared to the prior day’s 2,367.15 close, the Euro Stoxx 50 trades at 2,366.69, compared to a 2,372.80 intraday high.  The index is +3.15%  and +4.09% above its respective 20- and 50-day moving averages.  Most market segments are higher.  Leaders are financials, up +2.37%, industrials and oil and gas, which are up at least +0.79%. Laggards are utilities and consumer goods, which are up at least +0.09%, and technology, which is off -0.31%.
    Libor, LOIS, Currencies, Treasuries, Commodities:
    • Recent interbank lending rates suggest that the substantial stress, evident in the latter half of 2011 and centered on the health and liquidity of Eurozone banks, has peaked and begun to ease.  USD LIBOR is at 0.14600%, down from 0.14700% the prior day and the December 30th 0.15400% high.  USD 3-month LIBOR is 0.56700%, down from 0.57150% the prior day and recent January 4th peak of 0.58250%.
    • The US Libor-OIS (LOIS) spread fell to 48.45 bps from +48.85 bps the prior day, and compares to the recent January 6th high of 50.05 bps.  Euribor-OIS eased to 88.62 bps, from 89.60 bps Thursday and December 27th high of 28.80 bps.  A rise in the LOIS indicates an increased intra-bank lending risk premium.
    • The Euro 3-month basis swap continues to improve, but fell yesterday to -81.375 bps from -80.3750 bps the prior day, from a trough of -147.00 bps on December 14th.
    • The U.S. government overnight repo rate is 11.0 bps, unchanged from 11.0 bps Wednesday, and well off from the August 2nd high of 33 bps.
    • U.S. Treasury yields are slightly higher at the long end of the curve, with 2- and 10-year maturities yielding 0.225% and 1.8998%, respectively, compared to 0.229% and 1.923% Thursday.  The yield curve narrowed to +1.671%, compared to +1.694% 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 stronger mixed, better against the euro, slightly stronger compared to the British pound, and weaker against the Japanese yen.  The dollar trades at US$80.912, off the intraday high of US$80.994, and compares to US$80.770 at the prior day’s close, and above its US$79.322 50-day, US$78.082 100-day, and US$76.351 200-day averages.  The euro trades at US$1.2780, compared to an intraday low of US$1.2775, and compares to a close of US$1.2814 Thursday and US$1.2707 the day prior.  The euro trades worse than its US$1.3214 50-day and US$1.3499 100-day averages.  In Japan, the dollar trades at ¥76.72, compared to ¥76.76 Thursday and ¥76.85 the prior day.  The yen trades better than its 50-day moving average ¥77.48.
    • Commodities prices are mixed, with mixed energy, lower precious metals, mixed aluminum and copper, and mixed agriculture prices.
    Volatility, Skew:
    • The VIX ended at 20.47, down -2.76% from 21.05 at the prior close.  The VIX is -8.81% below its 22.45 20-day moving average.
    • The Euro Stoxx 50 volatility index (V2X) is down -3.95% to 27.43, compared to 28.55 the prior day.  The V2X index trades -9.54% below its 30.32 20-day moving average, -30.8% below the 39.63 30-day high, and +1.57% above the 27.00 30-day low.
    • The Hang Seng volatility index (VHSI) fell to 21.59, down -3.66% from 22.41 the prior day.  The VHSI index trades -13.2% below its 24.86 20-day moving average.
    • CBOE skew rose +0.48% to 120.78 from 120.20 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: 
    • December import price index , compared to survey -0.1% and prior +0.7%.
    • At 10:00, University of Michigan Confidence, preliminary January, with survey at 71.5 versus 69.9.
    Overseas news:  Today, Italy sold €4.75 billion in 3-year debt, the maximum amount targeted, with yields declining by -80 basis points from the prior auction.  In the fourth quarter, China’s foreign currency reserves fell versus the prior quarter for the first time since 1998, raising worried about capital outflows impacting the country’s economy.  Yesterday, press reports indicate a European Union oil embargo of Iran may be delayed up to six months. 
    Company news/ratings changes:
    ·         RF – initiated at market perform at Wells Fargo, $4-$5 price target
    ·         SBNY – initiated at market perform at Wells Fargo, $59-$61 price target
    ·         SIVB – initiated at market perform at Wells Fargo, $52-$54 price target
    ·         JPM – reports GAAP and operating EPS of $0.90 and $1.11, compared to estimates of $0.90
     
    4Q2011 Earnings.  The fourth quarter’s earnings reports have so far disappointed expectations.  Of the 3 S&P500 companies that reported earnings to date, 0% (0 out of 3) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies missed EPS expectations by an average of -4.8% (versus a historical average of +2%).  EPS is down -84.3% over the prior year, mostly from the impact of Alcoa’s negative earnings this quarter in a low sample size.  Though challenged in the current operating environment, 67% of companies reported increased revenues over the prior year and 67% beat revenue estimates.  In the fourth quarter of 2011, analysts estimate the SPX will earn $24.34 per share, compared to $25.19 and $22.25 per share in 3Q11 and 4Q10, a -3.4% and +9.4% change, respectively. 
    BKX members began fourth quarter reports today with JPMorgan Chase.  JPM reported GAAP and operating earnings of $0.90 and $1.11 per share, respectively, in-line with estimates.  In the fourth quarter, analysts estimate the BKX will earn $0.96 per share, compared to $1.24 and $0.91 per share in 3Q11 and 4Q10, a -22.6% and +5.5% change, respectively. 
    Valuation.  The SPX trades at 12.3x estimated 2012 earnings ($105.03) and 11.0x estimated 2013 earnings ($117.51), compared to 12.3x and 11.0 respective 2011-12 earnings yesterday.  The 10-year average median Price/Earnings multiple is 20.0x.  Since the beginning of 2012, analysts changed 2012 and 2013 earnings estimates by -3.4%, and -0.2%, respectively.  Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +10.6% and +23.7%, respectively. 
    Large-cap banks trade at a median 1.36x tangible book value, and 10.8x and 9.4x 2012and 2013 consensus earnings, respectively, compared to 1.35x tangible book value and 10.7x/9.3x 2012/2013 earnings yesterday.  These compare to the 10-year average median multiples of 3.08x tangible book value and 15.9x earnings.  In 2012, analysts expect the BKX to earn $4.47 per share, compared to $4.30 and $2.96 in 2011 and 2010, a +3.8% and +50.9% increase, respectively. 
    Options.  Options markets are neutral to bearish.  Composite options markets are neutral, index options markets are neutral, and equity options markets are bearish.  The composite put/call ratio closed at 0.83, compared to 0.79 the prior day and below its 5- and 10-period moving averages of 0.86 and 0.88, respectively.  The index put/call ratio closed at 1.25, compared to 1.30 the prior day, and below the 5- and 10-period moving averages of 1.26 and 1.25, respectively.  The equity put/call ratio closed the day at 0.58, compared to 0.56 the prior day and below its 5- and 10-period moving averages of 0.60 and 0.62, respectively.
    Price Exhaustion/Trend Reversal.  On a daily timeframe, technical price exhaustion metrics show the SPX reached a potential upward price exhaustion level Wednesday, the first such signal since April, with another potential indication coming on the next close above yesterday’s level.  Intra-day timeframes of 120- and 60-minute intervals show the SPX and BKX reached levels of upward price exhaustion on Tuesday, and the SPX exhibited additional 120- and 60-minute price exhaustion signals Wednesday and Thursday.
    NYSE Indicators.  Volume rose +1.44% to 770.06 million shares, 0.89x the 50-day moving average, from 759.12 million shares Tuesday.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +669 (compared to +259 the prior day), or 1.58:1.  Up volume led down volume by 1.52:1.
    SPX. On higher volume, the SPX rose +3.02 points, or +0.23%, to 1295.50.  Volume rose +2.02% to 580.34 million shares, up from 568.84 million shares Wednesday and below the 664.87 million share 50-day moving average.  For the 14th consecutive day, the SPX closed above its 50-day moving average (1,242.77) and remained above its 200-day moving average (1,258.08) for the 11th time in the past 13 sessions.  For the 106th straight session, the SPX’s 50-day moving average closed below its 200-day moving average, but the 50-day average’s positive trend has narrowed the range considerably.  The SPX closed above its 200-week moving average (1133.80) for the 67th straight session. 
    From its prior close at 1292.48, the SPX opened higher to 1295 and rose to the intra-day high of 1296.82 by 9:35.  Momentum reversed, and through 10:45, the index fell, turning negative at 10:05 and reaching the intra-day low of 1285.77.  After bottoming, the SPX reversed again and rallied consistently through the close.  The index nearly retook its morning high at 3:50 and closed at the high end of the day’s mixed range. 
    The SPX closed above all major moving averages, above 1200 for the 29th straight session, at the highest level since August 1st, but below 1300 for the 114th 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 16th straight session, the SPX closed (by +2.95%) above its 20-day moving average (1258.33).  The index closed (by +4.24%)above its 50-day moving average for the 16th straight session.  The index closed (by +6.55%) above its 100-day moving average (1215.83) for the 30th straight session.  The SPX closed +2.97% above its 200-day moving average for the 11th time in the past 13 sessions.  The 20-, 50-, and 100-day moving averages rose.  The directional momentum indicator was positive for the 15th straight session, and the trend is moderate.  Relative strength rose to 64.66 from 63.81, in the high end of a neutral range.  Next resistance is at 1299.62; next support is at 1288.57.
    BKX.  On higher volume, the KBW bank index rose +0.23 points, or +0.53%, to end at 43.61, its eighth straight close above 40 and its second straight close above the 2010 low of 42.98.  Volume rose +9.43% to 80.43 million shares, up from 73.50 million shares Wednesday but below the 81.22 million share 50-day average.  The BKX closed +1.47% above its August 30, 2010, closing low of 42.98, the trough of the 2010’s correction, and -24.75% and -21.61% below its April 23, 2010 (the post-2008 high point), and February 14, 2011 (the most recent high point) respective closes.
    Financials continued their market leadership, and large-cap banks performed in-line with regional banks.  From its prior close of 43.38, the BKX opened higher to 43.61 and rallied to the intra-day high of 43.74 by 9:35.  Through 10:50, the index reversed, falling back to break-even by 9:38 and reaching the intra-day low of 42.86.  Like the broader market, the index staged a rally through the close, retaking break-even at 2:45 and returning to the 43.60 opening level to close at the high end of the day’s mixed range. 
    Technical indicators are mixed, but improving.  On a percentage basis, bank stocks have outperformed the broader market’s rebound from the October lows, rising +33.23% from the 32.56 October 4th intra-day low compared to a +20.62% rebound in the SPX.  However, the BKX is still -21.6% below its 2011 high, compared to the SPX which has corrected only -5.0%.  Moving averages alignment is mixed, as the 20- and 50-day moving averages (40.00 and 38.89, respectively) moved above the 100-day moving average (38.23), and each average is rising.  The 100-day moving average appears to have troughed, though the 200-day moving average (42.96) 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 11th time in the past 12 days, the 20-day closed (by +1.11 points) above the 50-day, and the gap is expanding.  The 50-day moving average closed (by -4.08 points) below the 200-day moving average for the 149th straight session, but the gap continues to narrow.  The 100-day moving average closed (by -4.73 points) below the 200-day moving average for the 127th straight session, but the gap is narrowing.  The BKX closed (by +9.03%) above its 20-day moving average for the 18th time in the last 19 sessions.  The index closed (by +12.15%) above its 50-day moving average for the 14th straight session.  The index closed (by +14.06%) above the 100-day moving average for the 15th straight session.  The index closed (by +1.50%) above its 200-day moving average for the second straight session, having been below that level since June 1, 2011.  The index closed below 50.0 for the 156th straight session but above 40.0 for the eighth straight session.  The directional movement indicator was positive for the 13th consecutive session, and the trend is moderate.  Relative strength rose to 70.85 from 70.07, in an overbought range.  Next resistance is 43.95; next support at 43.07.
    Stocks: RF, SBNY, SIVB, JPM
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