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Stocks Open Lower, End Little Changed on Hesitant Trade

|Includes: BBT, KKR (KKR), UBS
This morning.  Equity markets are in a confirmed uptrend.  On Tuesday, markets rebounded from sharp, early losses to end mixed with little change.  The NYSE composite closed down    -0.21% on lower volume.  The SPX was unchanged, while the DJI and NASDAQ closed slightly higher, all on lower volume.  Recent distribution days number three (on September 30th, October 15th and 19th), with three for the DJI and NYSE, two for the SPX, and 1 for the NASDAQ.  Today’s trade appears primed to replay yesterday’s hesitant action.  December SPX futures are at 1175.90, down -5.89 points after fair value adjustment.  Next resistance is at 1189.26; next support is at 1179.87.
Technical indicators are mixed, but improving.  All major indexes closed above their 20-, 50-, 100-, and 200-day moving averages, and their respective 50-day moving averages have all moved back above their 200-day moving averages.  The NYSE composite index stands +13.0% above its August 26th closing low.  Directional movement indicators are positive.  Relative strength indices indicate that markets have moved into an overbought range.
Overnight USD LIBOR is 0.22563%, unchanged in the past 4 days.  USD 3-month LIBOR is 0.28813%, compared to 0.28844% the prior day.  Asian equity markets closed mixed, with the Nikkei and Hang Seng +0.10% and -1.85%, respectively.  European equity markets are mixed, with the Eurostoxx50 -0.04%, FTSE -0.48%, and DAX +0.08%.  On the EuroStoxx, financials are up +0.39%, the 4th best performing market segment.  Eurozone sovereign CDS spreads are mixed, but slightly wider in Ireland, Portugal, and Spain.  In currency markets, the dollar and yen are stronger, while the euro and pound are weaker.  The euro trades at US$1.3809, compared to $US1.3859 yesterday.  The dollar trades at ¥81.72 compared to ¥81.43 yesterday.  U.S. Treasuries are mixed compared to Friday, with the 2- and 10-year maturities yielding 0.406% and 2.696%, respectively, compared to 0.391% and 2.639% Tuesday.  The yield curve spread widened to +2.290% from +2.248% 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.  On the stronger dollar, commodities are lower, with lower oil and precious metals, mixed aluminum and copper, and lower agriculture prices.
3Q2010 Earnings.  Earnings results have generally exceeded EPS and revenue expectations.  Of the 209 S&P500 companies that reported earnings to date, 85% (177 of 209) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +9.25% (versus a historical average of +2%).  EPS is up +43.4% over the prior year.  Though challenged in the current operating environment, 169 companies (81%) reported increased revenues and 132 companies (63%) beat revenue estimates.  With 23 of 24 BKX members reporting, 78% (18 out of 23) beat operating EPS estimates, with a +25.4% average operating EPS surprise.  Bank revenues have disappointed slightly, missing expectations by -0.29% on average.
U.S. news.  Earnings continue to dominate.  Durable goods orders for September were mixed, better than expected at +3.3% versus +2.0% survey, but ex-transportation -0.8% compared to +0.5% survey.  New home sales in September will be released at 10:00.
Overseas news.  In September, Eurozone bank lending continued to improve with private-sector lending increasing 1.2%.  As expected, Korea’s growth momentum decelerated further last quarter.  Greek Finance Minister Papaconstantinou said Greece has serious tax collection compliance issues, causing bonds to fall and credit default swaps to widen.    
Tuesday’s equity markets.  On lower volume, equity markets closed narrowly mixed, after rebounding from an early sell-off.  The principal action was early, responding to earnings and currency moves.  Earnings continued to surprise positively, but dollar strength, prospective quantitative easing, and pre-election uncertainties tested market convictions.  Market breadth ended slightly negative.  Market segments closed mixed, with consumer services, oil and gas, and technology the best performers, while consumer goods, industrials, and health care fared worst.
Market sentiment remains variable, as there have been several failed uptrends in recent months.  The sustainability of the current uptrend has its skeptics, but the uptrend has been resilient.  All major index 50-day moving averages have recaptured their 200-day moving averages.  The September-October rally has brought all major indexes back above their early August and then September highs, to levels last seen in late April, before the euro-crisis and flash crash.  All indexes are at least +4.80% higher in 2010.  Despite the broader market’s recovery, financial stocks remain -21.4% below their April highs.  Political uncertainties ahead of the mid-term elections have probably become a near-term positive.  The latest week’s (October 21st) AAII Investor Bullish Sentiment index stood at 49.62, up from 47.10 on October 14th, but up from 42.53 on September 30th and 20.74 on August 26th, the 52-week low.  This is probably better read as a bearish indicator.
Technical indicators are mixed, but improving.  Major indices are above their respective 20-, 50-, and 100-, and 200-day moving averages.  With 50-day moving averages back above respective 200-day moving averages, markets are in a generally bullish configuration.  Directional movement indicators are positive, but short-term relative strength indicators in the lower-end of an overbought range.  Market volatility is elevated, but trending lower.  The VIX closed up +1.86% to 20.22 from 19.85 at Monday’s close, above 20 for the first time since October 19th.
Financials underperformed the broader markets.  The XLF, BKX, and KRX closed higher, +0.14%, +0.04%, and +0.26%, respectively. 
NYSE Indicators.  Volume fell -4.05% to 966.56 million shares, from 1.30 billion shares the prior day, and compared to the 1.031 billion share 50-day moving average.  Market breadth was negative, and up volume lagged down volume.  Advancing stocks trailed decliners by -239 (compared to +593 Monday), or 0.85:1.  Up volume lagged down volume by 0.93:1.
SPX.  On lower volume, the SPX rose +2.54 points to close at 1185.62, up +0.21%.  Volume fell -6.83% to 772.0 million shares, from 828.6 million shares the prior day.  Also, for the 3rd consecutive day, its 50-day moving average closed above its 200-day moving average (1126.72 versus 1121.96, respectively), confirming similar recent positive technical developments on the DJI, NYSE composite, and NASDAQ.
Responding to dollar strength, equity markets initially gapped lower, and within the first quarter hour, the SPX was -0.60% lower to its 1177.72 intraday low.  Responding to stronger than expected earnings, the SPX had rebounded to 1185 by 10:30, but tread water through 1:00.  Afternoon weakness took the SPX back to 1182 at 2:15, but markets rallied again, threatening a breakout as the SPX hit its intraday high of 1187.11 at 3:30.  Ultimately, the rally turned cold, and the SPX ended unchanged. 
The SPX closed +5.13% above its August 9th close of 1127.79 (the highest close prior to that month’s correction) and +3.30% above last month’s closing high of 1147.70 on September 28th.  The SPX closed +5.23% above its 50-day moving average (1126.72), closing above that average for the 37th consecutive day, and +5.68% above its 200-day moving average (1121.96), which trended higher on the day.  The SPX closed +11.4% above the 1064.59 close on the August 27th positive reversal, and +9.75% above the September 1st follow-through close of 1080.29.  The SPX closed -2.60% below its April 23rd closing high of 1217.28.  The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are mixed, but improving, as the SPX closed above its 20-, 50-, 100-, and 200-day moving averages, above its monthly August 7th and September 28th highs, and above 1180, a principal recent resistance point, after trading below that level intraday.  For the 4th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average.  The directional momentum indicator is positive, with a stable trend.  Relative strength rose slightly to 65.72 from 65.71 the prior day, in a short-term overbought range.  Next resistance is at 1189.26; next support is at 1179.87.
BKX.  On lower volume, financial stocks closed at 45.53, up +0.02 points or +0.04%.  The index closed +5.93% above its August 30 closing low of 42.98, the trough of the recent correction.
A mirror image of Monday’s trade, the BKX opened lower, but reversed immediately to test the flat line throughout the day’s remainder.  At the end, the BKX closed little changed.  Volume fell -38.1% to 117.13 million shares, from 189.26 million shares Monday, above the 147.3 million share 50-day average.  The BKX closed -21.4% below its 57.95 April 23rd closing high.
Technical indicators are mixed, but generally negative.  The BKX closed below its 20-, 50-, 100-, and 200-day moving averages (46.593, 46.08, 47.15, and 48.86, respectively).  The 20-, 50-, 100-, and 200-day moving averages trended lower.  The 50-day moving average closed (by -2.78 points) below the 200-day moving average, as it has since August 16.  The directional movement indicator is negative, with a stable trend.  Relative strength rose to 43.66 from 43.51, in the lower end of a neutral range.  Next resistance is 45.75; next support at 45.20.
ValuationThe SPX trades at 14.0x estimated 2010 earnings (revised up to $84.51 from $84.34) and 12.3x estimated 2011 earnings (revised up to $96.13 from $96.04), compared to 14.1x and 12.3x respective 2010-11 earnings yesterday.  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 +10.8%, +4.0%, and +4.7%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +13.8% and +28.9%, respectively.
Large-cap banks trade at a median 1.42x tangible book value and 12.2x 2011 earnings, compared to 1.44x tangible book value and 12.2x 2011 earnings yesterday.  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 +35.2%.  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 $13.78 and $0.65 per share, respectively.
Company news & research:
·         DBK – beat 3Q EPS estimates on better-than-expected investment banking
·         KKR – initiated at buy at BofA/ML, price target of $16
·         BBT – upgraded to buy at Janney Montgomery, price target of $28
·         UBS – downgraded to neutral at Credit Suisse, price target of $20.76

Disclosure: Long BBT