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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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  • U.S. Futures Modestly Lower; UK Growth Signals Recession 0 comments
    Jan 25, 2012 9:26 AM | about stocks: GS, MS, TCB, RF, KEY
    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. All major indexes are above their respective 20-, 50-, 100-, and 200-day moving averages. Their respective 200-day moving averages continue to trend lower, but are nearing upward inflection points. In Japan, equity markets closed moderately higher overnight. Chinese markets are closed this week for the New Year. European exchanges are moderately lower. The dollar is stronger. U.S. equity options markets suggest a neutral short-term outlook. Commodities prices are mostly lower. U.S. Treasury yields are lower at the long end of the curve, with the 10-year at 2.041%, down from 2.060% the prior day. U.S. repo rates are at 9 bps.

    The ECB's bank lending facilities has eased interbank lending and associated liquidity 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 early August.

    U.S. equity futures are moderately lower. After a fair value adjustment of -0.85 points, March SPX equity futures are at 1307.20, down -3.55 points. The SPX opens at 1314.65, -3.59% below its April 29, 2011, multi-year 1363.61 closing high, but +2.20% and +5.08% above its respective 20- and 50-day moving averages and +7.31% and +4.57% above its respective 100- and 200-day moving averages. Next resistance is at 1318.39. Next support is at 1308.49.

    Tuesday. Markets opened moderately lower, but quickly found support and rallied higher to close narrowly mixed. The Nasdaq closed up +0.09%, followed by the SPX, NYSE composite, and DJI, which closed off -0.10%, -0.19%, and -0.26%, respectively. From the 1316.00 prior close, the SPX opened at 1308 and quickly traded to an intraday low of 1306.06. The index rallied through most of the day, and after some mid-afternoon weakness, closed at the day's high.

    Market segments closed mixed. Leaders were industrials, consumer services, and technology, which gained at least +0.05%. Financials initially traded off more than -1%, but rallied and closed down -0.13%. Laggards were oil and gas, utilities, and telecommunications, which fell at least -0.25%. For a 5th consecutive day, all indexes closed above their respective 20-, 50-, 100-, and 200-day moving averages. Market breadth was positive. NYSE volume rose +2.74%, to 0.88x the 50-day moving average. Volatility rose +1.29%, but the VIX closed at 18.91, well off the 20.00 intraday high, set just after the open. The CBOE put/call skew remains elevated.

    Technically, the session was mixed. Trading desks reported a quiet day, but that when markets retreated at the open, there was never particularly strong selling pressure, and buyers again bought the dip. Worries center on how "exhausted" the current rally may be. "Performance anxiety" is cited as a factor in the recent daily rebounds. Rotation continues into higher beta market segments. First support is seen at 1306, then at 1293, 1276, 1267, and 1258, the 200-day moving average. Resistance is 1310 and 1325, where the SPX would equal the downward line from the October 17, 2007, high. Sentiment is improving, but investors remain cautious.

    European concerns appear near-term assuaged by the 3-year long-term refinancing operation (LTRO), which has allowed Eurozone banks to prefund redemptions due in 2012 that might otherwise have been difficult to fund. The last scheduled LTRO is February 29th. Other central banks (Brazil, PBOC) are also easing.


    Distribution days number 3 on the Nasdaq, SPX, and BKX, and 2 on the DJI and NYSE composite, unchanged.

    In Asia, equity markets closed modestly higher in Japan. Markets are closed in China this week for the New Year. Commentary focused on U.S. earnings, particularly AAPL's strong 1Q2012 report overnight, and a decline in the yen. In Japan, the NKY closed up +1.12% on a +19.4% increase in volume.

    In Japan, the NKY closed at 8,883.69, compared to 8,785.33 the prior day. The index closed +4.43% and +4.61% above its respective 20- and 50-day moving averages. The index opened at 8,840, and rallied through late afternoon to an intraday high of 8,911.62 before fading in the final half-hour. Market segments closed mostly higher. Leaders were technology, consumer goods, and basic materials, which rose at least +1.53%. Financials gained +0.89%. Laggards were health care, consumer services, and telecommunications, which closed down at least -0.11%.

    In China, markets are closed through Friday for the Lunar New Year.

    In Europe, equity indexes are moderately lower, on reports that the UK economy contracted -0.2% in 4Q2011. The Euro Stoxx 50, FTSE 100, and DAX are down -1.03%, -0.61%, and -0.55%, respectively. Compared to the prior day's 2,432.07 close, the Euro Stoxx 50 trades at 2,403.79, compared to a 2,439.26 intraday high and 2,398.42 intraday low. The index is +2.01% and +4.88% above its respective 20- and 50-day moving averages. Most market segments are lower. Leaders are health care, (up +0.02%), and consumer goods and consumer services (off at least -0.11%). Financials are down -1.27%. Laggards are oil and gas, utilities, and industrials, which are down at least -1.37%.

    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 is easing. USD LIBOR is at 0.14150%, down from 0.14450% the prior day and down from the December 30th 0.15400% high. USD 3-month LIBOR is 0.55660%, down from 0.55910% the prior day and January 4th peak of 0.58250%.
    • The US Libor-OIS (LOIS) spread fell to 46.03 bps, down from 47.16 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS eased to 78.9 bps, from 80.3 bps Tuesday and December 27th high of 98.80 bps. A fall in the LOIS indicates a decreased intra-bank lending risk premium.
    • The Euro 3-month basis swap continues to improve, rising to -74.0000 bps, the best level since August 5th, from -76.0000 bps the prior day, and up from a trough of -147.00 bps on December 14th.
    • The U.S. government overnight repo rate is 9.0 bps, down from 13.0 bps the prior day, and well off from the August 2nd high of 33 bps.
    • U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.238% and 2.042%, respectively, compared to 0.235% and 2.060% Tuesday. The yield curve narrowed to +1.802%, compared to +1.826% 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 against the euro, British pound, and Japanese yen. The dollar trades at US$80.222, just off the intraday high of US$80.266, and compares to US$79.868 at the prior day's close, and above its US$79.814 50-day, US$78.549 100-day, and US$76.576 200-day averages. The euro trades at US$1.2962, compared to an intraday low of US$1.2949, and compares to a close of US$1.3036 Tuesday and US$1.3013 the day prior. The euro trades worse than its US$1.3092 50-day and US$1.3390 100-day averages. In Japan, the dollar trades at ¥78.10, compared to ¥77.67 Tuesday and ¥77.02 the prior day. The yen trades better than its 50-day moving average ¥77.44.
    • Commodities prices are mostly lower, with lower energy, precious metals, mixed aluminum and copper, and mixed agriculture prices.

    Volatility, Skew:
    • The VIX ended at 18.91, up +1.29% from 18.67 at the prior close. The VIX is -10.5% below its 21.13 20-day moving average.
    • The Euro Stoxx 50 volatility index (V2X) is up +3.78% to 26.25, compared to 25.30 the prior day. The V2X index trades -9.54% below its 29.02 20-day moving average, -24.3% below the 34.69 30-day high, and +5.889% above the 24.79 30-day low.
    • The Hang Seng volatility index (VHSI) closed Friday at 21.81, down -2.37% from 22.34 the prior day. The VHSI index trades -7.23% below its 23.51 20-day moving average.
    • CBOE skew rose +1.23% to 127.38 from 125.83 at the prior day's close, but well above a neutral (115-120) range. The index tracks tail risks, the cost of buying out-of-the-money, long-dated options, i.e., options not affected by expirations. The rise suggests that investors are buying more puts than calls, a bearish signal. A spike to 130, as on January 18th close, correlates well with short-term market peaks.

    U.S. news and economic reporting:
    • The latest week's MBA mortgage applications fell -5.0%, compared to 23.1% prior.
    • At 10:00, the November and December House Price Index and Pending Home Sales are released.
    • At 12:30, the FOMC releases its meeting report and rate decision (no materials changes are expected). Bernanke will hold a press conference at 2:15.

    Overseas news: In the fourth quarter, U.K. GDP fell -0.2% over the prior quarter, missing estimates for a -0.1% contraction. In January, Germany's Ifo business climate index rose to 108.3 from 107.2 in the prior month, beating expectations for a rise to 107.6. Today, press reports indicate growing pressure on the European Central Bank to accept losses on Greek debt holdings as a part of the voluntary debt exchange the country is currently negotiating with private investors.

    Company news/ratings changes:

    · GS - downgraded to neutral from overweight at JPM

    · MS - downgraded to neutral from overweight at JPM

    · TCB - downgraded to sell at Evercore

    · RF - upgraded to buy at RBC, $7 price target

    · RF - downgraded to neutral at BofA/ML, $5.25 price target

    · KEY downgraded to sell at KBW

    4Q2011 Earnings. The fourth quarter's earnings reports have so far exceeded expectations. Of the 86 S&P500 companies that reported earnings to date, 63% (54 out of 86) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +4.2% (versus a historical average of +2%). EPS is up +3.0% over the prior year. Though challenged in the current operating environment, 69% of companies reported increased revenues over the prior year and 57% 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.

    With 21 out of 24 BKX members reporting fourth quarter earnings, 43% beat operating EPS estimates, with aggregated results disappointing by -12.2%, while 43% beat revenue estimates, with aggregated results missing by -0.9%. EPS is down by -19.6% over the prior year while revenue has decline by -3.8%. 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 12.6x estimated 2012 earnings ($104.44) and 11.2x estimated 2013 earnings ($117.51), compared to 12.6x and 11.2 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 -3.9%, and -0.2%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +10.0% and +23.7%, respectively.

    Large-cap banks trade at a median 1.31x tangible book value, and 10.6x and 9.2x 2012and 2013 consensus earnings, respectively, compared to 1.35x tangible book value and 10.6x/9.4x 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 $4.37 per share, compared to $4.30 and $2.96 in 2011 and 2010, a +1.6% and +47.6% increase, respectively.

    Options. Options markets are neutral. Composite options markets are neutral, index options markets are neutral to bearish, and equity options markets are neutral to bullish. The composite put/call ratio closed at 1.04, compared to 1.04 the prior day and above its 5- and 10-period moving averages of 0.88 and 0.84, respectively. The index put/call ratio closed at 1.85, compared to 1.83 the prior day, and above the 5- and 10-period moving averages of 1.41 and 1.28, respectively. The equity put/call ratio closed the day at 0.84, compared to 0.65 the prior day, above its 5- and 10-period moving averages of 0.61 and 0.60, respectively.

    Price Exhaustion/Trend Reversal. On a daily timeframe, technical price exhaustion metrics show the SPX reached a potential upward price exhaustion level on January 18th and 11th, the first such signals since April, while the S&P futures reached full upward price exhaustion on January 23rd. Intra-day timeframes of 120- and 60-minute intervals show the SPX reached levels of price exhaustion on January 10th and 13th, while the BKX recorded similar indications on the 11th and 12th.

    NYSE Indicators. Volume rose +2.74% to 742.71 million shares, 0.88x the 50-day moving average, from 722.90 million shares Monday. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +236 (compared to +498 the prior day), or 1.17:1. Up volume led down volume by 1.10:1.

    In January, we expect dividend accruals of $77.6 thousand.

    SPX. On higher volume, the SPX fell -1.35 points, or -0.10%, to 1314.65, the fifth straight close above 1300. Volume rose +0.80% to 588.77 million shares, up from 584.08 million shares Monday but below the 652.52 million share 50-day moving average. For the 22nd consecutive day, the SPX closed above its 50-day moving average (1,251.06) and remained above its 200-day moving average (1,257.23) for the 19th time in the past 20 sessions. For the 113rd 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 (1133.60) for the 74th straight session.

    From its prior close at 1316.00, the SPX gapped lower to 1310 and fell to the intra-day low of 1306.06 at 9:45. Through 11:30, the index rallied to the 1314 level, where momentum stalled. The index traded sideways at the 1314 level through the close to finish at the high end of the day's negative range.

    The SPX closed above all major moving averages, above 1200 for the 36th straight session and above 1300 for the fifth 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 23rd straight session, the SPX closed (by +2.20%) above its 20-day moving average (1286.32). The index closed (by +5.08%)above its 50-day moving average for the 23rd straight session. The index closed (by +7.31%) above its 100-day moving average (1225.12) for the 37th straight session. The SPX closed +4.57% above its 200-day moving average for the 18th time in the past 20 sessions. The 20-, 50-, and 100-day moving averages rose. The directional momentum indicator was positive for the 22nd straight session, and the trend is moderate. Relative strength fell to 68.19 from 69.09, the high end of a neutral range. Next resistance is at 1318.39; next support is at 1308.49.

    BKX. On lower volume, the KBW bank index fell -0.13 points, or -0.30%, to end at 43.47, its 15th straight close above 40 and closing above the 2010 low of 42.98 for the eighth time in the last nine sessions. Volume fell -13.37% to 68.92 million shares, down from 79.56 million shares Monday and below the 81.06 million share 50-day average. The BKX closed +1.14% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, but -24.99% and -21.86% below its April 23, 2010 (the post-2008 high point), and February 14, 2011 (the most recent high point) respective closes.

    Financials performed in-line with the market, and regional banks' gains outperformed large-cap banks' losses. From its prior close of 43.60, the BKX opened lower to 43.10 and fell another -1.0% by 9:40 to the intra-day low of 42.73. The index reversed almost as sharply, rising back to 43.20 by 10:00. The BKX traded mostly flat through 1:30, when a slower rally lifted the index to 43.50 by 2:45. The index set the intra-day high of 43.53 at 3:40, and closed at the top end of the day's negative 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 +33.51% from the 32.56 October 4th intra-day low compared to a +22.41% rebound in the SPX. However, the BKX is still -21.9% below its 2011 high, compared to the SPX which has corrected only -3.6%. Moving averages alignment is mixed, as the 20- and 50-day moving averages (41.88 and 39.43, respectively) moved above the 100-day moving average (38.62), and each average is rising. The 100-day moving average appears to have troughed, though the 200-day moving average (42.64) 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 18th time in the past 19 sessions, the 20-day closed (by +2.45 points) above the 50-day, and the gap is expanding. The 50-day moving average closed (by -3.22 points) below the 200-day moving average for the 156th straight session, but the gap continues to narrow. The 100-day moving average closed (by -4.02 points) below the 200-day moving average for the 134th straight session, but the gap is narrowing. The BKX closed (by +3.80%) above its 20-day moving average for the 25th time in the last 26 sessions. The index closed (by +10.25%) above its 50-day moving average for the 21st straight session. The index closed (by +12.55%) above the 100-day moving average for the 22nd straight session. The index closed (by +1.94%) above its 200-day moving average for the eighth time in nine sessions. The index closed below 50.0 for the 163rd straight session but above 40.0 for the 15th straight session. The directional movement indicator was positive for the 20th consecutive session, and the trend is strong. Relative strength rose fell to 68.19 from 67.29, a neutral range. Next resistance is 44.08; next support at 42.80.

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