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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 Creep Higher Following Yesterday's Strong Gains 0 comments
    Mar 14, 2012 9:10 AM | about stocks: BAC, BBT, BK, C, COF, FITB, GS, JPM, KEY, MS, PNC, STT, STI, USB, WFC, HBAN, RF, ZION
    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. Technical indicators are positive. All major indices are above their respective 20-, 50-, 100-, and 200-day moving averages. The SPX is in bull market territory, closing Tuesday up +29.9% above the 1074.77 October 4th intraday low.

    In Asia, equity markets closed mixed, with greater strength in Japan, where the yen continues to weaken. Commentary focused on strong U.S. equity gains in the prior session and housing prices in China. In Europe, stock exchanges are moderately higher, but off their best levels of the day. The dollar is mixed against the euro, pound, and Japanese yen. U.S. options markets suggest a neutral short-term outlook. Commodities prices are mixed. U.S. Treasury yields are higher, with the 10-year at 2.185%, up from 2.126% the prior day. U.S. repo rates are at 18 bps.

    The ECB's bank LTRO lending facilities are credited with easing interbank lending and associated liquidity problems. Overnight and 3-month LIBO and Euribor-OIS spreads are trending lower. The 3-month Euro basis swap fell to its best level since early August and less than half its worst level of late December.

    After a fair value adjustment of -0.39 points, March SPX equity futures are at 1393.60, up +3.29 points. The SPX opens at 1395.95, at a new multi-year 1378.04 intraday high, and +2.36% and +4.76% above its respective 20- and 50-day moving averages, and +8.68% and +10.8% above its respective 100- and 200-day moving averages. Next resistance is at 1404.08. First support is at 1379.87.

    Tuesday. Equity markets were positive through the day, but spiked higher after 3:00, when JPMorgan front ran the Fed's release of this year's "stress tests", when it announced an expected dividend increase and a renewed share repurchase authority. Led by financials, the Nasdaq rose +1.88%, followed by the NYSE composite, SPX, and DJI, which closed up +1.83%, +1.81% and +1.68%, respectively. All closed at new multi-year highs. NYSE volume rose +40.9% to 1.15x its 50-day moving average. Market breadth was positive.

    Technical factors are positive. All major exchanges closed above their respective 20-, 50-, 100-, and 200-day moving averages. Volatility fell another -5.37%, with the VIX closing at 14.80, down from 15.64 the prior day and its first close under 15 since April 28, 2011. The CBOE put/call skew collapsed -11.8% to 122.89, down from 139.25 the prior session. DJ transports rose +2.14%, far outperforming the DJI, closing at 5254.50, up from 5144.28 the prior day, and +1.67% and +0.90% above its 20- and 50-day moving averages. The TRAN remains -2.13% below its recent peak of 5,368.93 on February 3rd and has not confirmed subsequent DJI new highs.

    From its prior 1371.09 close, the SPX opened above 1377 and rose through 1:00, then drifted lower through the FOMC release at 2:15 and immediately thereafter. Markets were strengthening again when at 3:04, JPM released news of its dividend hike and share repurchases, which was soon followed by news that the Fed would release its stress tests on 21 financial institutions at 4:30. The SPX rallied 12 points in the final hour and closed at the intraday high. All market segments closed at least +0.21% higher. Leaders were financials, which rose +3.77%, and technology and industrials, which added at least +2.00%. Laggards were consumer goods, telecommunications, and utilities.

    Trading desks reported a quiet day interrupted by the late session surge. Debates as to the market's "fatigue" or "exhaustion" were answered definitively as equities powered to new highs, and Treasuries sold off. Liquidity was thin with little for sale. Short covering explains part of the late session move, but the Treasury sell off suggests that the liquidation there was moving into equities.

    Immediate support is 1380, then 1364 (the 20-day moving average), followed by 1351 (a -23.6% Fibonacci retracement, 1333 (50-day moving average), 1323 (a -38.2% Fibonacci retrace), and then 1297 (the January 12th high), and 1293 (the October 27th high). Immediate resistance is 1404, followed by 1412.


    The distribution day count is 3 on the DJI, 4 on the SPX and Nasdaq, and 5 on the NYSE composite. The BKX count is 6.

    In Asia, equity markets closed mixed, with greater strength in Japan. Volumes were mixed. Commentary focused on yesterday's strong U.S. equity gains. China weakened when the Chinese premier stated that home prices are too high. In Japan, the NKY closed up +1.53% on a -18.4% decrease in volume. In China, the HSI closed down -0.15% on a +41.4% increase in volume. The SHCOMP closed down -2.63% on a +72.8% increase in volume.

    In Japan, the NKY closed at 10,050.52, up from 9,899.08 the prior day. The index gapped higher to open above 10,060 and rallied through the morning session to an intraday high of 10,115.79, but profit taking ruled the afternoon, especially in the final minutes. The index closed +4.37% and +10.7% above its respective 20- and 50-day moving averages. All market segments closed at least +0.09% higher. Leaders were technology, industrials and financials, which closed at least +2.21%. Laggards were health care, utilities, and consumer services.

    In China, the Hang Seng closed at 21,307.89, up from 21,339.70 at the prior close. The index gapped higher to open above 21,550 and rallied to a late morning intraday high of 21,638.32, but profit taking erased all the day's gains and the index closed with a small loss. The index closed +0.05% and +4.36% above its 20- and 50-day moving averages. Market segments closed mixed. Leaders were consumer goods, industrials, and technology, which rose at least +0.10%. Laggards were oil and gas, consumer services, and telecommunications, which lost at least -0.89%. In Shanghai, the SHCOMP closed at 2,391.23, down from 2,455.80 at the prior close. The SHCOMP traded higher through early afternoon, to an intraday high of 2,476.22, when an official's home pricing comments sent markets lower. All market segments closed at least -1.27% lower. Leaders were telecommunications, financials, and oil and gas, which fell -1.69%. Laggards were industrials, consumer services, and technology.

    In Europe, equities are moderately higher, but off their intraday highs. Commentary focuses on more optimistic U.S. growth prospects. The Euro Stoxx 50, FTSE 100, and DAX are up +0.96%, +0.29%, and +1.03%, respectively. Each is above their respective 20-day 50-day, 100-, and 200-day moving averages. Compared to the prior day's 2,556.82 close, the Euro Stoxx 50 trades at 2,581.50, compared to the 2,593.89 intraday high. The index is +2.92% and +5.31% above its respective 20- and 50-day moving averages. Most market segments are higher. Leaders are utilities, financials, and technology, which are up at least +0.69%. Laggards are health care, up +0.07%, and consumer services and basic materials, which are down at least -0.23%.

    Libor, LOIS, Currencies, Treasuries, Commodities:
     

    • USD LIBOR is 0.14370%, up from 0.14250% the prior day, but down from the December 30th 0.15400% high. USD 3-month LIBOR is 0.47365%, up from 0.47355% the prior day and down from the January 4th peak of 0.58250%.
    • The US Libor-OIS (LOIS) spread fell to 34.37 bps, from 34.47 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS fell to 52.10 bps from 52.35 bps the prior day and the 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 improved to -60.125%, down from 63.665 bps the prior day, at their lowest levels since August 1st, and up from a trough of -147.00 bps on December 14th.
    • The U.S. government overnight repo rate is 18 bps, down from an August 2nd high of 33 bps.
    • U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.352% and 2.185%, respectively, compared to 0.346% and 2.126% Tuesday. The yield curve widened to +1.833%, from +1.780% 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 +2.77% on April 8, 2011.
    • The U.S. dollar is mixed against the euro, British pound, and Japanese yen. The dollar trades at US$80.211, compared to a US$80.435 intraday high and US$80.193 at the prior day's close, and worse against its US$79.639 50-day, US$79.150 100-day, and US$77.387 200-day averages. The euro trades at US$1.3081, compared to an intraday low of US$1.3031 and compares to a close of US$1.3084 the prior day. The euro trades better than its US$1.3096 50-day, but worse than its US$1.3234 100-day averages. In Japan, the dollar trades at ¥83.50, compared to ¥82.94 the day prior. The yen trades worse than its 50-day moving average ¥78.64.
    • Commodities prices are mixed, with mixed energy, lower precious metals, higher aluminum and copper, and mostly lower agriculture prices.

    Volatility, Skew:
    • The VIX ended at 14.80, down -5.37% from 15.64 at the prior close. The VIX is -18.0% below its 18.04 20-day moving average.
    • The Euro Stoxx 50 volatility index (V2X) is up +0.13% to 20.96, compared to 20.93 at the prior day's close. The V2X index trades -13.9% below its 24.34 20-day moving average, -27.9% below the 29.07 30-day high, and +0.95% above the 20.76 30-day low.
    • The Hang Seng volatility index (VHSI) closed at 21.22, up +2.71% from 20.66 the prior day. The VHSI index trades -4.70% below its 22.27 20-day moving average.
    • CBOE skew fell -11.8% to 122.89 from 139.25 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.

    U.S. news and economic reporting:

    · Import prices rose % in February, compared to survey +0.6% and prior +0.3%.

    · The 4Q2012 current account balance was -$ billion, compared to survey -$115.0 billion and -$110.3 billion prior.

    Overseas News. According to The Jerusalem Post, the U.S. gave Iran an ultimatum to either engage in the current round of nuclear talks or face a military confrontation this year. Today, Italy sold €5 billion of 3-year bonds at a +2.76% yield, down from +3.41% in the prior auction and the lowest level since October 2010. Last evening, Chinese Premier Wen delivered remarks to close out the National People's Congress and said property prices were still "far from reasonable" and the country will maintain existing price controls in the market. In February, India's inflation rose to +6.95% rate, above expectations for a +6.79% pace.

    Company News. Fed Stress Test results released (dividends on annual basis):

    1. BAC - no dividend or buyback increase

    2. BBT - increases dividend to $0.80 from $0.65, no buyback

    3. BK - increases dividend to $0.52 from $0.48, $1.16 billion buyback authorized

    4. C - Fed rejected proposed increases in dividend and buyback activity, as proposed capital plan left C's Tier 1 common ratio under 5% in stressed case

    5. COF - no dividend or buyback increase announced

    6. FITB - Fed rejected proposed increases in dividend and buyback authority, will allow FITB to buyback stock equal to gains on Vantiv IPO

    7. GS - capital plan approved, no disclosure as to amount

    8. JPM - increases dividend to $1.25 from $1.00, increases buyback to $15 billion of which $12 billion allowed for 2012.

    9. KEY - increases dividend to $0.20 from $0.12, announces new $344 million share buyback

    10. MS - Fed approved plan for no dividend increase, no buyback request, but ability to purchase C's share of MSSB.

    11. PNC - Fed approved plan for dividend increase and modest buyback, no specifics yet announced

    12. STT - no press release issued

    13. STI - Fed rejects proposed dividend increase and buyback authorization, as proposed capital plan left STI's Tier 1 common ratio under 5% in stressed case

    14. USB - increases dividend to $0.78 from $0.50, and new 100 million share buyback authority

    15. WFC - increases dividend to $0.88 from $0.48, capital plan allows for increased buyback activity in 2012 versus 2011, when it repurchased $2.5 billion of stock.

    16. HBAN - approved to maintain dividend and adds new buyback authority of $182 million in stock.

    17. RF - approved to repay $3.5 billion in TARP with a $900 million common equity issuance

    18. ZION - approved to repay $1.4 billion in TARP in two installments with only $855 million of debt issuance (no common equity raise) provided financial condition does not deteriorate through the second half of this year

    4Q2011 Earnings. The fourth quarter's earnings reports exceeded expectations. Of the 473 S&P500 companies that reported earnings to date, 68% (319 out of 473) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +3.1% (versus a historical average of +2%). EPS is up +4.9% over the prior year. Though challenged in the current operating environment, 73% of companies reported increased revenues over the prior year and 56% 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 13.4x estimated 2012 earnings ($104.36) and 11.8x estimated 2013 earnings ($117.94), compared to 13.1x and 11.6 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 -4.0%, and +0.1%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +9.9% and +24.2%, respectively.

    Large-cap banks trade at a median 1.40x tangible book value, and 11.4x and 9.7x 2012and 2013 consensus earnings, respectively, compared to 1.34x tangible book value and 10.9x/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 $4.30 per share, compared to $4.30 and $2.96 in 2011 and 2010, a +0.1% and +45.4% 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 0.85, compared to 1.06 the prior day and below its 5- and 10-period moving averages of 0.94 and 0.96 respectively. The index put/call ratio closed at 1.12, compared to 1.56 the prior day, and below the 5- and 10-period moving averages of 1.36 and 1.34, respectively. The equity put/call ratio closed the day at 0.61, compared to 0.70 the prior day, below its 5- and 10-period moving averages of 0.64 and 0.66, respectively.

    Price Exhaustion/Trend Reversal. On a daily timeframe, technical price exhaustion metrics show the SPX and S&P futures began reaching potential upward price exhaustion levels as early as January 18th, the first such signals since April, and repeatedly through February with the most recent reading on February 21st. Intra-day timeframes of 120- and 60-minute intervals show the SPX and BKX reached multiple levels of potential price exhaustion in January and February with the most recent indicator coming on March 8th. March 5th's close was below the lowest close in the previous four days and recorded a new four-day, intra-session low, a pattern which may have signaled a reversal's initiation. A reversal could extend as low as 1170 on the SPX but more likely would be confined to a -11% decline.

    NYSE Indicators. Volume rose +40.9% to 907.12 million shares, 1.15x the 50-day moving average, from 643.71 million shares Monday. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +1,813, (compared to -365 the prior day), or 3.92:1. Up volume led down volume by 10.2:1.

    SPX. On higher volume, the SPX rose +24.86 points, or +1.81%, to 1395.95, the 39th straight close above 1300 and the highest level since June 5, 2008. Volume rose +41.89% to 672.61 million shares, up from 474.04 million shares Monday and above the 614.55 million share 50-day moving average. For the 56th consecutive day, the SPX closed above its 50-day moving average (1332.54) and remained above its 200-day moving average (1260.00) for the 52nd time in the past 53 sessions. The SPX closed above its 200-week moving average (1133.04) for the 107th straight session.

    From its prior close at 1371.09, the SPX opened higher to 1377 and hit the intra-day low of 1376, and rallied to 1385 through 1:00. The Federal Reserve's policy statement at 2:15 lifted the SPX back to 1385 but the index gradually retraced to 1382 by 3:00. News of the Fed's bank stress test results hit around 3:00, and the market rallied strongly, rising +13 points in the final hour and closing at the intra-day high.

    The SPX closed above 1200 for the 71st straight session, above 1300 for the 39th session, and at the highest level since June 2008 . 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 has troughed and is increasing. 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 fourth straight session, the SPX closed (by +2.36%) above its 20-day moving average. The index closed (by +4.76%)above its 50-day moving average for the 57th straight session. The index closed (by +8.68%) above its 100-day moving average (1284.45) for the 71st straight session. The SPX closed +10.79% above its 200-day moving average for the 52nd time in the past 53 sessions. All moving averages increased. The directional momentum indicator is positive for the fourth straight session, and the trend is strong but declining. Relative strength rose to 69.73 from 61.05, the high end of a neutral range. Next resistance is at 1404.08; next support is at 1379.87.

    BKX. On very high volume, the KBW bank index rose +2.08 points, or +4.58%, to 47.49, its 48th straight close above 40 and its highest close since July 25, 2011. Volume rose +127.21% to 116.17 million shares, up from 51.13 million shares Monday and above the 76.92 million share 50-day average. The BKX closed +10.49% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, but -18.05% and -14.63% below its April 23, 2010 (the post-2008 high point), and February 14, 2011 (the most recent high point) respective closes.

    Following the surprise intra-day release of the Fed's bank stress test results, financials were the market's best performing sector, and large-cap banks outperformed regional banks. From its prior close of 45.41, the BKX opened higher to 45.73, immediately setting the intra-day low. Through 11:45, the index rallied to 46.30 before retracing gains back to 46.10 by 2:15. The Fed's policy statement provided a short burst the morning's highs. The release of the Fed's bank stress test results, and the corresponding dividend and buyback increases for many of the large-cap banks, fueled a surging rally in trading's final hour. The BKX rose +3.0% in 50 minutes, setting the intra-day high of 47.57 at 3:45, and closed just below that level.

    Technical indicators are turning positive. On a percentage basis, bank stocks have outperformed the broader market's rebound from the October lows, rising +45.85% from the 32.56 October 4th intra-day low compared to a +29.98% rebound in the SPX. However, the BKX is still -14.6% below its 2011 high, compared to the SPX which is +2.4% above its 2011 peak. On February 22nd, the 50-day moving average crossed above the 200-day moving average for the first time in 176 sessions, or since June 15th. Moving average alignment remains mixed, as the 100-day moving average (41.24) is still below the 200-day moving average (41.63), though a bullish cross should occur next week. The 20-day (45.21) is above all moving averages and the 50-day (43.97) is above the 100- and 200-day moving averages. For the 52nd time in the past 53 sessions, the 20-day closed (by +1.23 points) above the 50-day, but the gap contracted. The 50-day moving average closed (by +2.34 points) above the 200-day moving average for the 16th straight session, and the gap widened. The 100-day moving average closed (by -0.39 points) below the 200-day moving average for the 168th straight session, but the gap is narrowing. The BKX closed +5.06% above its 20-day moving average for the fourth straight session. The index closed (by +8.00%) above its 50-day moving average for the 55th straight session. The index closed (by +15.16%) above the 100-day moving average for the 56th straight session. The index closed (by +14.07%) above its 200-day moving average for the 38th time in 39 sessions. The index closed below 50.0 for the 197th straight session but above 40.0 for the 49th straight session. The directional movement indicator is positive for the third straight session, and the trend is moderate. Relative strength rose to 66.19 from 58.14, the high end of a neutral range. Next resistance is 48.18; next support at 46.20.

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