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Daily Market Summary, October 4, 2010

|Includes:CFR, OZRK, PNC, TCB, UBS Group AG (UBS), XL
This morning.  Equity markets are in a confirmed uptrend, and major indexes closed higher Friday, but lower for the week, the 1st weekly loss in the past five.  There have been four distribution days since the uptrend commenced on August 27th, (September 7th, 17th, 21st, and 30th) numbering one for the DJI, two for the SPX and NASDAQ, and three for the NYSE composite.
The NYSE composite index stands +10.1% above it August 26th closing low.  All major indexes closed above their 20-, 50-, and 100-, and 200-day moving averages, but 50-day moving averages remain below their respective 200-day moving averages.  Directional movement indicators are positive, but trends are stable.  Relative strength indices have the market in the lower end of an overbought range.  December SPX futures are at 1138.70, down -3.04 points after fair value adjustment.  Next resistance is at 1151.22; next support is at 1140.34.
Overnight USD LIBOR is 0.22563%, compared to 0.22813% the prior day.  USD 3-month LIBOR is at 0.29063%, unchanged from the prior day.  Asian markets closed mixed, with the Nikkei     -0.25% and the Hang Seng +1.17%.  European equity markets are lower, with the Eurostoxx50 -0.85%, FTSE -0.18%, and DAX -1.03%.  Financials are down -0.80% on the EuroStoxx.  Eurozone sovereign CDS spreads are narrower.  In currency markets, the dollar and pound are stronger.  The euro and yen are weaker.  The euro trades at US$1.3706, compared to US$1.3791 Thursday.  U.S. Treasuries are stronger compared to Friday, with the 2- and 10-year maturities yielding 0.399% and 2.486%, respectively, compared to 0.414% and 2.510% the prior day.  The yield curve spread narrowed to 2.087%, from +2.096% the prior day.  In the past year, the 2- and 10-year spread has varied from a low of +1.959% on August 26, 2010, and a high of +2.90% on January 11, 2010.  Across the commodity complexes, prices are generally lower, with higher petroleum and precious metals, higher aluminum and copper, and lower agricultural products prices.
U.S. news.  Today’s economic reports included August personal income and spending, and PCE at 8:30.  Both exceeded expectations.  At 10:00, the University of Michigan Confidence index and ISM manufacturing (both for September) will be released; also, construction spending for August.  The September jobs report will be released on October 8.  California has announced a budget agreement, without any increase in taxes.
Overseas news.   A Swiss government-appointed panel will require UBS and Credit Suisse to hold double the total capital threshold under new Basel III rules, but the restrictions are less onerous than feared.  September German car sales fell -18%, according to an industry group.  China Primer Jiabao said China will continue to buy European government debt and will stimulate domestic demand to stabilize and further expand its economy.  In September, China’s non-manufacturing industries expanded at a faster pace.  In September, Russia’s inflation climbed to a 7% annual rate as drought-fueled agriculture costs surged.
Friday’s equity markets.  As on Thursday, equity markets initially gapped higher through resistance at 1147-1148, but to a lower intraday high of 1150.30 on the SPX, compared to 1157.16 the prior day.  By 10:45, the SPX had lost all its gains, but rallied through the afternoon to close with a small gain on the day, but slightly lower on the week.  Markets were adversely impacted by downgrades of recent market leaders, including Netflix.  Baidu and Priceline have traded down from recent new highs.  Green Mountain Coffee continued a skid that began after disclosure of a SEC investigation into its accounting practices.
Markets’ reactions to euro strength were more muted Friday, but reacted negatively to reports of possible terrorist activity in Europe and travel advisories from the U.S. State Department. 
Market segments closed mostly higher; only technology closed lower.  Basic materials, oil and gas, and financials were the best performers, rising at least +0.98%.  Health care, consumer services, and technology were the worst performers.
Market sentiment remains variable, as there have been several failed uptrends in recent months.  The sustainability of the current uptrend is viewed skeptically, but the uptrend has proved more durable than recent others, which failed after a few days.  Political uncertainties ahead of the mid-term elections are the principal negative, but the September rally has taken all major indexes back above their early August highs, and all indexes are higher in 2010.  Market strength is evident in NASDAQ composite, which in the past week saw 276 new 52-week highs, compared to 59 new lows.  The latest week’s (Sept 30th) AAII Investor Sentiment index stood at 42.53, down from 44.97 on September 23rd, but up from 20.74 on August 26th, the low recent reading.  Despite the broader market’s recovery, financial stocks remain nearly -20% below their April highs.  Dollar weakness and the flatter yield curve qualify as additional market negatives.
Technical indicators are mixed, with the major indices above their respective 20-, 50-, and 100-, and 200-day moving averages, but 200-day moving averages remain above 50-day moving averages.  Directional movement indicators are positive.  Short-term relative strength indicators suggest that the market is at the lower end of an overbought range.  Market volatility is elevated.  The VIX fell -5.06% to 22.50 from 23.70 at Thursday’s close.
The XLF, BKX, and KRX closed mixed, +1.08%, +1.13%, and -0.30%, respectively.
NYSE Indicators.  Volume fell -16.5% to 1.072 billion shares, from 1.283 billion shares Thursday and above the 1.018 billion share 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by  +1047 (compared to +66 Thursday), or 2.19:1.  Up volume led down volume by 3.21:1.
SPX.  On increased volume, the SPX rose +5.04 points, or +0.44% to close at 1146.24, +1.64% above its August 9th close of 1127.79.  The SPX closed +2.52% above its 200-day moving average (1118.03), which edged higher on the day, and +3.69% above its 50-day moving average (1105.42), closing above that average for the 21st consecutive day.  The SPX closed +7.67% above the 1064.59 close on the August 27th positive reversal, and +6.10% above the September 1st follow-through close of 1080.29.  The SPX closed -5.84% below its April 23rd closing high of 1217.28.  The 20-, 50-, and 200-day moving averages rose, while the 100-day moving average continues to trend lower.
Technical indicators are mixed, as the SPX closed above the 200-day moving average for the 15th consecutive day, well above its August 7th high, but below 1147, where resistance has been evident in the past four trading days.  The directional momentum indicator is positive, but the trend is stable.  Relative strength rose to 62.49 from 60.68, in the lower end of an overbought range.  Next resistance is at 1151.22; next support at 1140.34.
BKX.  Financials were the 3rd strongest market segment, although the bank indexes closed mixed.  The BKX rose +0.52 points, or +1.13%, to close at 46.72, 8.70% above its August 30 closing low of 42.98, the trough of the recent correction. 
For the 2nd consecutive day, financials were initially quite strong, but after early gains, profit taking brought the index back to the intraday 46.20 low by 10:45.  After 12:30, financials rallied again to the intraday 46.99 high, but profit taking shave gains in the final hour. 
Volume was higher, rising +13.0% to 164.9 million shares, compared to 145.9 million shares the prior day and 123.0 million share 50-day average.  The BKX closed -19.4% below its 57.95 April 23rd closing high.
Technical indicators are mixed.  Financials rose out of bear market territory, but were down slightly for the week, the first such decline in the past 5 weeks.  The BKX closed above its 20- and 50-day moving averages (46.64 and 46.63, respectively).  It closed below its 100- and 200-day moving averages (47.86 and 48.62, respectively).  The 20- and 200-day moving averages moved higher.   The 50—and 100-day moving averages trended lower.  The 50-day moving average closed below the 200-day moving average for the 33rd consecutive day, but its trend has switched between positive and negative in the recent days.  The directional movement indicator is slightly positive, with a stable trend.  Relative strength rose to 51.91 from 48.92, in a neutral range.  Next resistance is 47.07; next support at 46.28.
ValuationThe SPX trades at 13.7x estimated 2010 earnings (revised up to $83.88 from $83.16) and 12.0x estimated 2011 earnings (revised up to $95.94 from $95.22), compared to 13.7x and 12.0x respective 2010-11 earnings Friday.  The 10-year average median Price/Earnings multiple is 20.0x.  Since the beginning of the year, analysts increased 2010, 2011, and 2012 earnings estimates by +10.0%, +3.0%, and +4.7%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +13.5% and +29.9%, respectively.
Large-cap banks trade at a median 1.42x tangible book value and 12.7x 2011 earnings, compared to 1.42x tangible book value and 12.9x 2011 earnings Friday.  These compare to the 10-year average median multiples of 3.08x tangible book value and 15.9x earnings.  Analysts expect 2011 large-cap bank earnings to exceed 2010 earnings by +41.5%.  In 3Q2009, large-cap banks earned a combined $5.91 per share while the BKX Index earned -$1.24 per share.  In 3Q2010, earnings estimates call for $13.68 and $0.48 per share, respectively.
Company news & research:
·         UBS – removed from “most preferred” banks at BofA/ML.
·         PNC – rated new buy at Collins Stewart, price target of $70
·         CFR – cut to neutral at JPMorgan
·         XL – cut to neutral at Credit Suisse
·         TCB – a long research tactical idea at Morgan Stanley
·         OZRK – increases dividend by $0.01 to $0.16 for 3Q10, ex-date of 10/15/10.

Disclosure: Long PNC. XL