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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 Reverse Lower After U.S. GDP Disappoints 0 comments
    Jan 27, 2012 8:54 AM | about stocks: C, GS, MS, USB
    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. Notably, their respective 200-day moving averages are at upward inflection points. For example, the Nasdaq's 200-day moving average rose 178 bps yesterday, its 2nd consecutive upward move, reversing a 5-month decline. The SPX's 200-day moving average fell 3 bps yesterday, and appears poised to reverse a decline that commenced in early August.

    In Japan, equity markets closed modestly lower overnight. Chinese markets are closed this week for the New Year, but reopen Monday. European exchanges are modestly mixed, but off their intraday highs. The dollar is weaker. U.S. equity options markets suggest a neutral short-term outlook. Commodities prices are mostly higher. U.S. Treasury yields are higher at the long end of the curve, with the 10-year at 1.949%, up from 1.931% the prior day. U.S. repo rates are at 10 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 and less than half its worse level of late December.

    After release of a mildly disappointing 4Q2011 U.S. GDP report, equity futures are modestly lower. After a fair value adjustment of +0.97 points, March SPX equity futures are at 1310.20, down -4.13 points. The SPX opens at 1318.43, -3.31% below its April 29, 2011, multi-year 1363.61 closing high, but +2.05% and +5.15% above its respective 20- and 50-day moving averages and +7.42% and +4.87% above its respective 100- and 200-day moving averages. Next resistance is at 1330.07. Next support is at 1310.20.

    Thursday. Equity markets reversed early gains to end with moderate losses. The SPX had the greatest loss, down -0.57%, followed by the Nasdaq, NYSE composite, and DJI, which fell -0.46%, -0.42%, and -0.18%, respectively. Volumes rose marginally, with distributions on all but the DJI. Commentary focused on the follow-on effects of Wednesday's FOMC surprise, when a more dovish than expected report sent markets higher and forced covering of short positions. Given that equities appear over-bought short-term, investors reduced positions, and pressured equities lower. Trading desks report that while the selling pressure was never particularly severe, the recent tendency to see buying on the dips did not materialize in Thursday's trade.

    From the 1326.05 prior close, the SPX opened at 1330 and quickly traded to an intraday low of 1333.47, but by mid-morning, most indexes were lower. The SPX trended steadily lower to a late session intraday low of 1313.60, before rallying into the close. Financials, which have led markets in recent weeks, started mixed and may have signaled the reversal, when money centers greatly outperformed the super-regionals and especially the regional banks. While GS, MS, and C closed higher on the day, the BKX and regional bank KRX closed off -2.23% and -2.57%, respectively. Among market segments, only defensive utilities closed higher, up +0.28%. Other leaders were consumer services and industrials, which lost at least -0.10%. Laggards were financials, oil and gas, and telecommunications, which closed off at least -0.85%.

    For a 6th consecutive day, all indexes closed above their respective 20-, 50-, 100-, and 200-day moving averages. Market breadth was negative. NYSE volume rose +4.35%, to 0.96x the 50-day moving average. Volatility initially fell, but rose as equities fell, to an intraday high of 19.17 before slipping into the close. The CBOE put/call skew remains elevated, but also moved down.

    Technically, the bearish reversal was obviously negative, as the 1333 level on the SPX is viewed as technically important, and the SPX briefly traded below last week's 1315.38 close. The SPX must close above that level to avoid a negative reversal for the week. Subsequent support at 1306 and 1293 are vital to sustain the recent uptrend. Next support is at 1267 and 1258, the 200-day moving average. Resistance is 1334 and 1345.

    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 rose to 4 on the Nasdaq, SPX, and BKX, and 3 on the NYSE composite. Distribution days on the DJI number 2, unchanged.

    In Asia, equity markets closed modestly lower in Japan. In Japan, the NKY closed down -0.05% on a +8.92 increase in volume. Commentary focused on the strengthening of the yen, which adds headwinds to economic growth. In China, markets open Monday after having been closed this week for the New Year.

    In Japan, the NKY closed at 8,841.22, compared to 8,849.47 the prior day. The index closed +3.62% and +6.96% above its respective 20- and 50-day moving averages. The index opened at 8,850, and traded in late morning to an intraday high of 8,886.02, but lost ground through mid-afternoon to 8,810.89 before rebounding in the final hour. Market segments closed mixed. Leaders were oil and gas, utilities, and telecommunications, utilities, which rose at least +0.45%. Laggards were consumer goods, technology, and financials, which ended at least -0.20% lower.

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

    In Europe, equity indexes are modestly mixed, after having traded modestly higher at mid-morning. Commentary focuses on U.S. economic reports and comments from Davos, where much of the focus is on Greek sovereign debt management prospects. The Euro Stoxx 50, FTSE 100, and DAX are down -0.44%, -0.38%, and +0.06%, respectively. Compared to the prior day's 2,460.40 close, the Euro Stoxx 50 trades at 2,459.17, compared to a 2,467.62 intraday high and 2,442.88 intraday low. The index is +3.62% and +6.96% above its respective 20- and 50-day moving averages. Most market segments are lower. Leaders are basic materials and health care, which are up at least +0.09%. and utilities, down -0.08%. Laggards are consumer goods, financials, and industrials, which are down at least -0.46%.

    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 0.14100%, unchanged from 0.14100% the prior day, but down from the December 30th 0.15400% high. USD 3-month LIBOR is 0.55110%, down from 0.55310% the prior day and January 4th peak of 0.58250%.
    • The US Libor-OIS (LOIS) spread fell to 46.21 bps, down from 46.36 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS eased to 77.9 bps, from 79.2 bps Thursday 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 -68.8750 bps, at levels of early August, from -68.6250 bps the prior day, and up from a trough of -147.00 bps on December 14th.
    • The U.S. government overnight repo rate is 10.0 bps, unchanged from 10.0 bps the prior day, 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 0.211% and 1.949%, respectively, compared to 0.211% and 1.931% Thursday. The yield curve widened to +1.738%, compared to +1.721% 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, British pound, and Japanese yen, and is near the day's lows. The dollar trades at US$79.185, compared to the US$79.116 intraday low and to the US$79.395 at the prior day's close, and below its US$79.846 50-day, US$78.594 100-day, and US$76.625 200-day averages. The euro trades at US$1.3145, compared to an intraday high of US$1.3145, and compares to a close of US$1.3109 Thursday and US$1.3095 the day prior. The euro trades better than its US$1.3081 50-day, but below its US$1.3379 100-day averages. In Japan, the dollar trades at ¥76.97, compared to ¥77.45 Thursday and ¥77.78 the prior day. The yen trades better than its 50-day moving average ¥77.44.
    • Commodities prices are higher, with higher energy, precious metals, aluminum and copper, and mixed agriculture prices.

    Volatility, Skew:
    • The VIX ended at 18.57, up +1.42% from 18.31 at the prior close. The VIX is -10.9% below its 20.84 20-day moving average.
    • The Euro Stoxx 50 volatility index (V2X) is up +0.41% to 24.34, compared to 24.24 the prior day. The V2X index trades -14.0% below its 28.29 20-day moving average, -27.1% below the 33.37 30-day high, and +1.58% above the 23.96 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 fell -1.80% to 122.96 from 125.22 at the prior day's close, but above a neutral (115-120) range. The index tracks market tail risks, the cost of buying out-of-the-money, long-dated options, i.e., options not affected by expirations. A 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:
    • January Kansas City Fed manufacturing activity rose to 7, compared to survey 2 and -4 prior.
    • Preliminary 4Q2011 GDP was +2.8%, compared to survey +3.0% and prior +1.8%. Government services came in particularly light. Personal consumption rose +2.0%, compared to survey +2.4% and +1.7% prior. The GDP price index rose +0.4%, compared to survey +1.9% and prior +2.6%.

    Overseas news: In the fourth quarter, Spain's jobless rate increased to 22%.

    Company news/ratings changes:

    · USB - upgraded to neutral at Atlantic Securities

    · MS - downgrade to sell at Atlantic Securities

    4Q2011 Earnings. The fourth quarter's earnings reports have so far exceeded expectations. Of the 158 S&P500 companies that reported earnings to date, 67% (106 out of 158) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +3.9% (versus a historical average of +2%). EPS is up +3.7% over the prior year. Though challenged in the current operating environment, 73% of companies reported increased revenues over the prior year and 58% 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 ALL 24 BKX members reporting fourth quarter earnings, 42% beat operating EPS estimates, with aggregated results disappointing by -16.7%, while 46% beat revenue estimates, with aggregated results missing by -0.9%. EPS is down by -20.4% over the prior year while revenue has decline by -3.8%. In the fourth quarter, the BKX earned $1.25 per share, compared to $1.24 and $0.91 per share in 3Q11 and 4Q10, a +0.8% and +37.4% change, respectively.

    Valuation. The SPX trades at 12.6x estimated 2012 earnings ($104.89) and 11.2x estimated 2013 earnings ($117.51), compared to 12.6x and 11.3 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 -3.5%, and -0.2%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +10.4% and +23.7%, respectively.

    Large-cap banks trade at a median 1.33x tangible book value, and 10.3x and 8.8x 2012and 2013 consensus earnings, respectively, compared to 1.33x tangible book value and 10.5x/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 $4.34 per share, compared to $4.30 and $2.96 in 2011 and 2010, a +0.9% and +46.6% increase, respectively.

    Options. Options markets are neutral. Composite options markets are neutral, index options markets are neutral, and equity options markets are neutral. The composite put/call ratio closed at 0.97, compared to 0.77 the prior day and above its 5- and 10-period moving averages of 0.92 and 0.85, respectively. The index put/call ratio closed at 1.48, compared to 1.06 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 0.65, compared to 0.57 the prior day, above its 5- and 10-period moving averages of 0.65 and 0.61, 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 +4.35% to 866.56 million shares, 1.03x the 50-day moving average, from 830.46 million shares Wednesday. Market breadth was slightly negative, and up volume lagged down volume. Advancing stocks lagged decliners by -61 (compared to +1,561 the prior day), or 0.96:1. Up volume lagged down volume by 0.52:1.

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

    SPX. On higher volume, the SPX fell -7.62 points, or -0.57%, to 1318.43, the seventh straight close above 1300. Volume rose +1.73% to 701.99 million shares, up from 690.03 million shares Wednesday and above the 654.94 million share 50-day moving average. For the 24th consecutive day, the SPX closed above its 50-day moving average (1,253.88) and remained above its 200-day moving average (1,257.19) for the 21st time in the past 22 sessions. For the 115th 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 (1133.79) for the 76th straight session.

    From its prior close at 1326.05, the SPX opened higher to 1330 and rose to the intra-day high of 1333.47 at 10:00. Economic data at 10:00 disappointed, and the market reversed, falling into negative territory by 10:30. Through 3:30, the index sold-off, hitting the intra-day low of 1313.60. A small rally into the close lifted the index back to 1318 at the bell, but the SPX still ended at the bottom of the day's mixed range.

    The SPX closed above all major moving averages, above 1200 for the 38th straight session and above 1300 for the seventh 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. The 200-day moving average appears to be bottoming. For the 25th straight session, the SPX closed (by +2.05%) above its 20-day moving average (1292.00). The index closed (by +5.15%)above its 50-day moving average for the 25th straight session. The index closed (by +7.42%) above its 100-day moving average (1227.33) for the 39th straight session. The SPX closed +4.87% above its 200-day moving average for the 20th time in the past 22 sessions. The 20-, 50-, and 100-day moving averages rose and the 200-day moving average declined by only three basis points. The directional momentum indicator was positive for the 25th straight session, and the trend is strong. Relative strength fell to 66.49 from 71.57, the high end of a neutral range. Next resistance is at 1330.07; next support is at 1310.20.

    BKX. On higher volume, the KBW bank index fell -0.97 points, or -2.23%, to end at 42.56, its 17th straight close above 40 and but closing below the 2010 low of 42.98 for the first time in seven sessions. Volume rose +12.64% to 82.29 million shares, up from 73.05 million shares Wednesday and above the 81.09 million share 50-day average. The BKX closed -0.98% below its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, but -26.56% and -23.49% 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 banks. From its prior close of 43.53, the BKX opened higher to 43.84, immediately setting the intra-day high. At 10:00, the index headed lower, crossing into negative territory at 10:02 and reaching 42.80 by 10:45. Through 1:30, the index traded sideways before another sell-off dropped the BKX to 42.40 at 1:40, dipping below the 200-day moving average. The index set the intra-day low of 42.32 at 3:30. A closing bell rally lifted the BKX by half a percent at the close to finish above the 200-day moving average.

    Technical indicators are mixed, but improving. On a percentage basis, bank stocks have outperformed the broader market's rebound from the October lows, rising +30.71% from the 32.56 October 4th intra-day low compared to a +22.76% rebound in the SPX. However, the BKX is still -23.5% below its 2011 high, compared to the SPX which has corrected only -3.3%. Moving averages alignment is mixed, as the 20- and 50-day moving averages (42.21 and 39.58, respectively) moved above the 100-day moving average (38.70), and each average is rising. The 100-day moving average appears to have troughed, though the 200-day moving average (42.55) 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 20th time in the past 21 sessions, the 20-day closed (by +2.62 points) above the 50-day, and the gap is expanding. The 50-day moving average closed (by -2.97 points) below the 200-day moving average for the 158th straight session, but the gap continues to narrow. The 100-day moving average closed (by -3.85 points) below the 200-day moving average for the 136th straight session, but the gap is narrowing. The BKX closed (by +0.84%) above its 20-day moving average for the 27th time in the last 28 sessions. The index closed (by +7.52%) above its 50-day moving average for the 23rd straight session. The index closed (by +10.0%) above the 100-day moving average for the 24th straight session. The index closed (by +0.03%) above its 200-day moving average for the 10th time in 11 sessions. The index closed below 50.0 for the 165th straight session but above 40.0 for the 17th straight session. The directional movement indicator was positive for the 22nd consecutive session, and the trend is strong. Relative strength fell to 56.90 from66.32, a neutral range. Next resistance is 43.61; next support at 41.92.

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