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Ireland Bailout Underwhelms, Futures Point to Lower Open

|Includes: Barclays PLC (BCS)
This morning.  Underwhelmed by the Irish bailout, equity futures are modestly lower this morning.  European markets initially responded well, but Moody’s warned that it will downgrade Irish debt to the lowest  investment grade.  Contagion fears shift to Spain and Portugal.  The dollar is somewhat stronger in early trading.  Commodities are generally stronger.  December SPX futures are at 1193.60, down -4.63 points after fair value adjustment.  Next resistance is at 1203.32; next support is at 1192.79.
 
Technical indicators are mixed.  All major indexes are higher on the year, but closed below their April highs.  The NYSE closed below its 200-week moving averages.  Only the NASDAQ closed below its 20-day moving average.  Directional movement indicators are negative, with weak trend strength.  On the other hand, all major indexes closed above their 50-, 100-, and 200-day moving averages.  Also, their respective 50-day moving averages are above 200-day moving averages.  Relative strength indicators suggest that markets are in a neutral range.
 
Asian equity markets closed mixed, with the Nikkei and Hang Seng +0.93% and -0.35%, respectively.  European equity markets are lower, with the Eurostoxx50 -0.54%, FTSE -0.56%, and DAX +0.03%.  On the EuroStoxx, financials are down -1.46%, the worst performing market segment, with particularly weakness among Italian, Spanish, and Portuguese banks.  Eurozone sovereign CDS spreads are slightly narrower today, after the weekend’s Irish bailout.
 
LIBOR trends remain unremarkable.  Overnight USD LIBOR is 0.23063%, ticking up from 0.22938% the prior day.  USD 3-month LIBOR is 0.28438%, unchanged since November 11th.  Currency markets are little changed, with modestly weaker dollar and euro and stronger yen and pound.  The euro trades at US$1.3666, compared to US$1.3673 the prior day.  The dollar trades at ¥83.53, compared to ¥83.552 Friday.  U.S. Treasuries are little changed compared to Friday, with 2- and 10-year maturities yielding 0.513% and 2.859%. respectively, compared to 0.505% and 2.871% .  The yield curve spread widened to +2.346% compared to +2.366% Friday.  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.  Commodities are higher, with higher petroleum and precious metals, but lower aluminum and copper, and higher agricultural prices.
 
3Q2010 Earnings.  Earnings results have generally exceeded EPS and revenue expectations.  Of the 458 S&P500 companies that reported earnings to date, 76% (347 of 458) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +6.6% (versus a historical average of +2%).  EPS is up +31.8% over the prior year.  Though challenged in the current operating environment, 364 companies (80%) reported increased revenues and 280 companies (61%) beat revenue estimates.  With all 24 BKX members reporting, 79% (19 out of 24) beat operating EPS estimates, with a +25.3% average operating EPS surprise.  Bank revenues have disappointed slightly, missing expectations by -0.30% on average.
 
U.S. news.  Due to Thanksgiving holiday, it is one of the year’s lightest weeks for economic releases.  Today, the Chicago Fed national activity index for October is released at 8:30.  On Tuesday, revised 3Q2010 GDP is released, with surveys expecting upward revision to +2.4% from +2.0%.  Wednesday, the latest week’s initial and continuing jobless claims report is released, with an expected 435K.  Equity markets close Friday at 1:00.
 
Overseas news.  Ireland formally activated the European Union/IMF bailout framework this weekend.  While talks continue and could stretch for weeks, Ireland anticipates the package will stay under €100 billion but may target both the country’s and the banking sector’s finances.  Moody’s announced a potential multi-notch downgrade of Ireland while anticipating the country’s investment grade status will be retained.  Several large U.S. multi-national companies, including Intel, Microsoft, and HP, cautioned Ireland against raising its current 12.5% corporate tax rate.   In Portugal, the opposition party leader said the country’s public debt and deficits are higher than what has been published officially.  China told its banks to expand agricultural lending in order to increase food supplies and cool inflation.  North Korea is allegedly expanding its nuclear ambitions by building another enrichment facility. 
 
Company news/research:
 
·         The Financial Times cites a new Barclays Capital report projecting a $100-$150 billion capital hole for the top 35 banks under the Basel III framework.  However, the report appears to analyze bank capital levels under the immediate implantation of Basel III, compared to the planned phase-in through 2012.  In general, analysts expect organic capital formation and management at the banks will be sufficient to meet the new capital requirements. 
 
Friday’s equity markets.  Major indexes erased early losses and ended with small gains of between +0.15% (NASDAQ) and +0.28% (NYSE).  Despite options expiration, volume declined.  For the week, the DJI, SPX, and NYSE composite rose slightly; the NASDAQ declined, but only by less than 1/10th of a point.  Economic reporting was light.  Most of the day’s focus was on eurozone developments, particularly the shape of the Ireland bailout.  Market breadth was positive, and up volume led down volume, both by large margins.  Most market segments closed higher, though financials and utilities closed lower.  Basic materials, oil and gas, and industrials were the best performers, up more than +0.49%.  Telecommunications, financials, and utilities were the worst performers. 
 
Market sentiment is mixed, as markets moved into correction on November 16th.  Major indexes are at least +6.35% higher in 2010, but the SPX closed -1.44% below its April 23rd close, the high point prior to the May-August correction.  While the broader indices have recovered most of their correction losses, financial stocks have not, closing -20.6% below their April highs and mired well into bear market territory.
 
The latest week’s (November 18th) AAII Investor Bullish Sentiment index fell -30.5% to 40.00 from 57.56 on November 11th.  This is a neutral reading, but also the lowest since September 2nd, just after the commencement of the latest confirmed uptrend.  Sentiment indicators are highly variable, but this reading is probably best read as somewhat bullish.
 
Technical indicators are mixed, but improved slightly.  The SPX closed above its below its 200-week moving average, after 5 consecutive closes below that level.  At 7641.08, the NYSE composite closed below it 7728.84 200-week moving average.  Also, the SPX closed above its 20-day moving average (1198.14), joining the NYSE composite.  The DJI and NASDAQ closed below their respective 20-day moving averages.  All closed above their respective 50-, and 100-, 200-day averages.  Markets are in a generally bullish configuration, with 50-day moving averages above respective 200-day moving averages.  Directional movement indicators are negative, with a weak trend.  Short-term relative strength indicators moved up slightly, but remain in a neutral range.  Market volatility moved down.  The VIX closed down -3.79% to 18.04 from 18.75 at Thursday’s close, below 20.0 for the 2nd time since November 12th and at its lowest level since April 26th.
 
Financials underperformed the SPX.  The XLF, BKX, and KRX closed down -0.04%, -0.26%, and -0.19%, respectively.
 
NYSE Indicators.  Volume fell -8.11% to 1.102 billion shares, from 1.199 billion shares the prior day, and compares to the 1.056 billion share 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks exceeded decliners by +534 (compared to +1894 Thursday), or 1.43:1.  Up volume lagged down volume by 1.43:1.
 
ValuationThe SPX trades at 14.1x estimated 2010 earnings ($85.09) and 12.4x estimated 2011 earnings ($96.48), compared to 14.1x and 12.4x 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 +11.6%, +4.3%, and +5.3%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +13.4% and +28.8%, respectively.
 
Large-cap banks trade at a median 1.42x tangible book value and 12.2x 2011 earnings, compared to 1.43x tangible book value and 12.3x 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 +34.3%.  In 3Q2009, large-cap banks earned a combined $5.91 per share while the BKX Index earned -$1.24 per share.  In 3Q2010, large-cap banks earned $13.78 and the BKX earned $0.71 per share.
 
SPX.  On increased volume, the SPX rose +3.04 points, or +0.25% to end at 1199.73.  Volume rose +15.2% to 958.78 million shares, from 862.54 million shares the prior day and above the 862.8 million share 50-day moving average.  For the 22st consecutive day, its 50-day moving average closed above its 200-day moving average (1170.59 versus 1130.28, respectively).  The SPX closed above its 200-week moving average (1190.99), after four consecutive daily closes below that level.
 
The SPX gapped lower and within the first half hour touched an intraday low of 1189.44, where it found support.  After 10:30, the SPX began to rally modestly, reaching the prior day’s closing level by 1:00, and extending the gains into the close, with a weak test of resistance at 1200.  The SPX closed +6.14% above its 50-day moving average (1170.59), closing above that average for the 55th consecutive day, and +6.14% above its 200-day moving average (1130.28), which trended higher on the day.  The SPX closed -1.44% below its April 23rd closing high of 1217.28.  The 20-, 50-, 100-, and 200-day moving averages rose.
 
Technical indicators are mixed as the SPX closed below its April highs for the 7th consecutive day.  The directional momentum indicator is slightly negative, but trend strength is weak.  Relative strength rose to 55.62 from 54.27, moving to the middle of a neutral range, from moderately oversold.  Next resistance is at 1203.32; next support is at 1192.79.
 
BKX.  On lower volume, the KBW bank index closed at 46.00, down -0.12 points, or -0.26%.  The index closed +7.03% above its August 30 closing low of 42.98, the trough of the recent correction, but -20.6% below its April 23rd closing high, well into bear market territory. 
 
Financial stocks underperformed the broader indexes.  The BKX gapped lower and trade to an intraday low of 45.57 shortly after 10:00, and began a rally back to an intraday high of 46.12 just after 2:00.  Over the next hour, the index lost some ground, but found support at 45.80, and gained into the close.  Volume was 145.34 million shares, down -6.24% from 155.02 million shares the prior day, and compares to 153.0 million share 50-day average.
 
Technical indicators are mixed, but generally negative.  The BKX closed below its 20-, 50-, 100-, and 200-day moving averages (46.57, 46.70, 46.82, and 48.87, respectively).  The 20- and 200-day moving averages trended higher.  The 50- and 100-day averages trended lower.  The 50-day moving average closed (by -2.17 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 fell to 45.49 from 46.20, still in a moderately oversold range.  Next resistance is 46.22; next support at 45.67.
 


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