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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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  • Employment Report Propels U.S. Futures Higher 0 comments
    Feb 3, 2012 8:49 AM | about stocks: BBT
    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, on January 31st, the SPX 50-day moving average crossed above the 200-day moving average. Also on January 31st, the SPX 200-day moving average recaptured an upward trend, ending a 5-month long decline.

    In Asia, equity markets closed mixed, with greater strength in China. The HSI rose for its 5th straight week and closed at its best levels since last August. The SHCOMP rose for a 3rd consecutive week and is at its best levels since early December. European exchanges are modestly higher, but off the day's best levels, though financials stocks are the top segment with gains of about +0.50%. The dollar is mixed, and slightly weaker against the euro. U.S. equity options markets suggest a neutral short-term outlook. Commodities prices are mixed. U.S. Treasury yields are modestly lower across the yield curve, with the 10-year at 1.819%, down from 1.821% the prior day. U.S. repo rates are at 14 bps.

    The ECB's bank lending facilities have 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.

    Economic reporting focuses on the January U.S. employment report and unemployment rate, which surprised positively this morning. After a fair value adjustment of -0.91 points, March SPX equity futures are at 1335.50, up +13.71 points. The SPX opens at 1325.54, -2.79% below its April 29, 2011, multi-year 1363.61 closing high, but +1.55% and +5.02% above its respective 20- and 50-day moving averages and +7.38% and +5.43% above its respective 100- and 200-day moving averages. Next resistance is at 1329.30. Next support is at 1321.68.

    Thursday. Equities meandered through the session, ending mixed on lower volume, as investors seemed unwilling to risk much more ahead of today's employment report. The Nasdaq had the best +0.40% gain, followed by the NYSE composite and SPX, which ended up +0.18% and +0.11%, respectively. The DJI closed down -0.09%. Leaders were financials, oil and gas, and consumer goods, which gained at least +0.17%. Laggards were industrials, health care, and utilities, which ended down at least -0.16%. Trading desks reported a quiet session, in which weakness is bought, but where there is little enthusiasm or perceived need to chase stocks to the upside. Sentiment remains skeptical.

    From its prior 1324.09 close, the SPX opened at 1327, and after retesting support at 1323, rallied to a mi-morning intraday high of 1329.19. A spate of profit taking brought the index back to test support at 1322 at mid-day. The index then rallied modestly back to 1326 and thereafter traded sideways into the close. For a 9th consecutive day, all indexes closed above their respective 20-, 50-, 100-, and 200-day moving averages. Market breadth was positive. NYSE volume fell -13.7% to 1.06x the 50-day moving average. Volatility opened lower and trended lower through early afternoon to an intraday low of 18.09 on the VIX, but closed at 18.55 down -4.58%. The CBOE put/call skew remains elevated, but at 121.39, above a neutral range.

    Technically, the day was mixed, as the uptrend in moving averages became more pronounced, though the SPX again never challenged its January 26th intraday 1333.47 high. In addition to immediate support at 1315, other important support levels include 1305 (20-day moving average), 1297 (the January 12th high), 1293 (the October 27 high), and 1283 (a 38.2% retrace of the rally since December 19). Resistance is 1327 (the October 2007 monthly downtrend line). A close above last week's highs would signal a new upward target of 1350-56.

    Distribution days number 4 on the SPX and 3 on the Nasdaq, DJI, and NYSE composite. On the BKX, the December 27th distribution became stale, reducing the count to 4.

    In Asia, equity markets closed mixed, with better strength in China. In Japan, the NKY closed down -0.51% on a +2.51% increase in volume. In China, the HSI and SHCOMP closed up +0.08% and +0.77%, respectively, on a -20.8% and +24.4% increase in volume. Hong Kong stocks rose for a 5th consecutive week, setting their longest streak since 2010. Commentary focused on the January non-manufacturing PMI report, which disappointed at 52.9, down from prior 56.0.

    In Japan, the NKY closed at 8,831.93, compared to 8,876.82 the prior day. The index closed +2.20% and +3.52% above its respective 20- and 50-day moving averages. The index opened at 8,855, and traded to a mid-afternoon intraday high of 8,869.18, but profit taking took the index lower in the final two hours to an intraday low of 8,825.98 about an hour before the close. Market segments closed mostly lower. Leaders were oil and gas, technology, and utilities, which gained at least +0.40%. Laggards were financials, health care, and telecommunications, which declined at least -0.98%.

    In China, the Hang Seng closed at 20,756.98, its best close since last August, up from 20,739.45 at the prior close. The index opened lower at 20,710 but strengthened through the morning session to mid-day intraday high of 20,796.74. Profit taking took the index back to a retest of support at 20,700 in late afternoon, but investors bought the dip, allowing the index to finish the day with a small gain. The index closed +1.25% higher on the week. The index is +6.10% and +9.88% above its respective 20- and 50-day moving averages. Most market segments rose. Leaders were industrials, consumer goods, and basic materials, which closed at least +0.19% higher. Financials rose +0.19%. Laggards were oil and gas, technology, and telecommunications, which fell at least -0.14%. In Shanghai, the SHCOMP closed at 2,330.41, from 2,312.56 at the prior close. The SHCOMP opened lower and dipped to an intraday low of 2,301.11 in the first hour. Support held, and the index rallied and trended higher through the most of the session, to an intraday high of 2,336.27. Most market segments closed higher. Leaders were technology, health care, and consumer goods, which rose at least +1.08%. Financials rose +0.82%. Laggards were utilities, which rose +0.39%, and oil and gas and telecommunications, which closed at least -0.01% lower.

    In Europe, equity indexes opened lower, reversed, and now modestly higher, but off their mid-morning highs. Commentary focused on 4Q2011 earnings, which have been unimpressive. The Euro Stoxx 50, FTSE 100, and DAX are up +0.13%, +0.43%, and +0.14%, respectively. Compared to the prior day's 2,478.15 close, the Euro Stoxx 50 trades at 2,481.01, compared to a 2,467.70intraday low and 2,492.06 intraday high. The index is +3.75% and +6.90% above its respective 20- and 50-day moving averages. Market segments are mixed. Leaders are financials, consumer goods, and technology, which are up at least +0.39%. Laggards are consumer services, telecommunications, and oil and gas, which are down at least -0.30%.

    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 rose to 0.14200%, from 0.14100% the prior day, but down from the December 30th 0.15400% high. USD 3-month LIBOR is 0.52700%, down from 0.53060% the prior day and from the January 4th peak of 0.58250%.
    • The US Libor-OIS (LOIS) spread fell to 41.95 bps, down from 42.41 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS rose to 76.27 bps, from 76.05 bps Wednesday 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 -68.1250 bps, at levels of early August, from -69.2500 bps the prior day, and up from a trough of -147.00 bps on December 14th.
    • The U.S. government overnight repo rate fell to 14.0 bps, down from 19.0 bps the prior day, but off from the August 2nd high of 33 bps.
    • U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.218% and 1.819%, respectively, compared to 0.223% and 1.821% Thursday. The yield curve widened to +1.601%, compared to +1.599% 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 mixed, slightly weaker against the euro and British pound, and slightly stronger against the Japanese yen. The dollar trades at US$78.907, compared to the US$79.052 intraday high and US$78.991 at the prior day's close, and mixed against its US$79.855 50-day, US$78.702 100-day, and US$76.763 200-day averages. The euro trades at US$1.3165, compared to an intraday low of US$1.3115, and compares to a close of US$1.3144 Thursday and US$1.3161 the day prior. The euro trades better than its US$1.3058 50-day, but worse than its US$1.3349 100-day average. In Japan, the dollar trades at ¥76.28, compared to ¥76.22 Thursday and ¥76.20 the prior day. The yen trades better than its 50-day moving average ¥77.34.
    • Commodities prices are mixed, with higher energy, lower precious metals, aluminum, and copper, and higher agriculture prices.

    Volatility, Skew:
    • The VIX ended at 17.98, down -3.07% from 18.55 at the prior close. The VIX is -9.17% below its 19.80 20-day moving average.
    • The Euro Stoxx 50 volatility index (V2X) is down -0.71% to 24.39, compared to 24.56 at the prior day's close. The V2X index trades -9.29% below its 26.88 20-day moving average, -26.9% below the 33.37 30-day high, and +1.77% above the 23.96 30-day low.
    • The Hang Seng volatility index (VHSI) closed at 21.77, down -3.93% from 22.66 the prior day. The VHSI index trades -5.10% below its 22.94 20-day moving average.
    • CBOE skew roe +0.72% to 122.26 from 121.39 at the prior day's close, and 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:

    · Change in January non-farm payrolls, which rose 243K, better than survey 140K and prior +200K.

    · The unemployment rate fell to 8.3%, better than survey 8.5% and prior 8.5%.

    · At 10:00, January ISM non-manufacturing composite, with survey at 53.2 and prior 52.6.

    Overseas news: Today, the Greek government announced the 2011 fiscal deficit is expected to be between -9.1 and -9.4% of GDP, smaller than previously expected due to a recent emergency property tax. In January, the Eurozone services purchasing managers index came in at 50.4, slightly missing expectations of no change at 50.5. In January, Japan's services PMI rose to 51.0 from 50.4 in December, the second highest reading since its September 2007 introduction.

    Company news/ratings changes:

    · BBT - upgraded to neutral at Barclays, $34 price target

    4Q2011 Earnings. The fourth quarter's earnings reports have so far exceeded expectations. Of the 258 S&P500 companies that reported earnings to date, 66% (171 out of 258) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +2.9% (versus a historical average of +2%). EPS is up +3.3% over the prior year. Though challenged in the current operating environment, 72% 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 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 12.7x estimated 2012 earnings ($104.68) and 11.2x estimated 2013 earnings ($117.94), 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 -3.7%, and +0.1%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +10.2% and +24.2%, respectively.

    Large-cap banks trade at a median 1.35x tangible book value, and 10.5x and 9.2x 2012and 2013 consensus earnings, respectively, compared to 1.35x tangible book value and 10.3x/9.0x 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 0.87, compared to 0.84 the prior day and below its 5- and 10-period moving averages of 0.88 and 0.90, respectively. The index put/call ratio closed at 1.31, compared to 1.11 the prior day, and below the 5- and 10-period moving averages of 1.31 and 1.35, respectively. The equity put/call ratio closed the day at 0.63, compared to 0.62 the prior day, below its 5- and 10-period moving averages of 0.63 and 0.64, 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 S&P futures reached full upward price exhaustion on January 23rd. An alternative calculation that better respects the current uptrend's strength shows S&P futures within one or two higher closes of potential price exhaustion. Intra-day timeframes of 120- and 60-minute intervals show the SPX and BKX reached multiple levels of potential price exhaustion most recently as January 25th and 12th, respectively. A reversal in the SPX from these levels could extend as low as 1170.

    NYSE Indicators. Volume fell -9.21% to 810.39 million shares, 0.97x the 50-day moving average, from 892.64 million shares Wednesday. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +410 (compared to +1,973 the prior day), or 1.32:1. Up volume led down volume by 1.34:1.

    SPX. On lower volume, the SPX rose +1.45 points, or +0.11%, to 1325.54, the 12th straight close above 1300. Volume fell -13.25% to 584.45 million shares, down from 673.75 million shares Wednesday and below the 650.88 million share 50-day moving average. For the 29th consecutive day, the SPX closed above its 50-day moving average (1262.14) and remained above its 200-day moving average (1257.31) for the 26th time in the past 27 sessions. The SPX closed above its 200-week moving average (1133.55) for the 81st straight session.

    From its prior close at 1324.09, the SPX opened higher to 1327, retraced to break-even by 9:45, then rallied to the intra-day high of 1329.19 at 10:50. Through 12:40, the index reversed, turning negative at 12:10 and reaching the intra-day low of 1321.57. A rebound rally from 12:40 through 2:00 retook the break-even line and reached 1326. The index traded sideways through the close to finish with a modest gain and a new multi-month high.

    The SPX closed above all major moving averages, above 1200 for the 43rd straight session and above 1300 for the 12th 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 50-day moving average climbed above the 200-day moving average on January 31st, having been below that average since August 11th. For the 30th straight session, the SPX closed (by +1.55%) above its 20-day moving average (1305.34). The index closed (by +5.02%)above its 50-day moving average for the 30th straight session. The index closed (by +7.38%) above its 100-day moving average (1234.46) for the 44th straight session. The SPX closed +5.43% above its 200-day moving average for the 25th time in the past 27 sessions. All moving averages rose. The directional momentum indicator was positive for the 30th straight session, and the trend is strong. Relative strength rose to 67.56 from 67.03, the high end of a neutral range. Next resistance is at 1329.30; next support is at 1321.68.

    BKX. On lower volume, the KBW bank index rose +0.32 points, or +0.74%, to end at 43.62, its 21st straight close above 40. Volume fell -29.05% to 55.60 million shares, the lightest of the year, down from 78.37 million shares Wednesday and below the 80.54 million share 50-day average. The BKX closed +1.49% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, and -24.73% and -21.59% below its April 23, 2010 (the post-2008 high point), and February 14, 2011 (the most recent high point) respective closes.

    Financials were the market's best performing segment, and large-cap banks outperformed regional banks. From its prior close of 43.30, the BKX opened slightly higher to 43.40, quickly dropped into negative territory and set the intra-day low of 43.14 at 9:40. Reversing, the BKX rose back to break-even by 10:00 and rallied to 43.86 by 11:00, setting the intra-day high. Gains retraced back to the 43.60 level, and the index traded sideways there through the close.

    Technical indicators are mixed, but improving. On a percentage basis, bank stocks have outperformed the broader market's rebound from the October lows, rising +33.97% from the 32.56 October 4th intra-day low compared to a +23.42% rebound in the SPX. However, the BKX is still -21.6% below its 2011 high, compared to the SPX which has corrected only -2.8%. Moving averages alignment is mixed, as the 20- and 50-day moving averages (42.97 and 40.08, respectively) moved above the 100-day moving average (38.99), and each average is rising. The 200-day moving average (42.35) 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 25th time in the past 26 sessions, the 20-day closed (by +2.90 points) above the 50-day, and the gap is expanding. The 50-day moving average closed (by -2.27 points) below the 200-day moving average for the 163rd straight session, but the gap continues to narrow. The 100-day moving average closed (by -3.36 points) below the 200-day moving average for the 141st straight session, but the gap is narrowing. The BKX closed (by +1.51%) above its 20-day moving average for the fourth straight session. The index closed (by +8.84%) above its 50-day moving average for the 28th straight session. The index closed (by +11.88%) above the 100-day moving average for the 29th straight session. The index closed (by +3.00%) above its 200-day moving average for the 11th time in 12 sessions. The index closed below 50.0 for the 170th straight session but above 40.0 for the 22nd straight session. The directional movement indicator was positive for the 27th consecutive session, and the trend is strong. Relative strength rose to 62.75 from 60.82, a neutral range. Next resistance is 43.94; next support at 43.22.

    Stocks: BBT
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