This morning. After last evening’s tax deal, equity futures are much higher this morning. The agreement extends the “Bush-era” tax rates for another two years, as are current capital gains and dividend treatments. Estate taxes exempt the 1st $5 million and the top tax rate is reduced to 35%, from 55%. Markets are enthused. After fair value adjustment, December SPX futures are up +11.48 points at 1233.90, above next resistance at 1225.72. Next support is at 1220.59.
In December, equity markets have resumed the confirmed uptrend that began on August 31st. Markets closed mixed yesterday, as the NASDAQ closed at another 2010 closing high, while the other averages fell fractionally. Volume was lower across the board.
Asian equity markets closed mixed, with the Nikkei -0.26% and Hang Seng +0.82% after opening lower. Markets expect that Chinese monetary authorities will raise rates this weekend. European equity markets are higher, with the Eurostoxx50 +1.58%, FTSE +1.32%, and DAX +1.09%. On the EuroStoxx, financials are up +0.85%, but are ahead of only telecommunications and among the worst performing market segments. Germany declared the €440 billion stabilization fund sufficient and rejected proposals for a Euro-wide bond.
Overnight USD LIBOR is 0.24156%, up from 0.24031% Monday and above the November 0.22563% lows. USD 3-month LIBOR edged down to .30219 from 0.30344% yesterday, but above the +0.28438% lows of mid-November. The dollar is slightly weaker against the pound, euro, and yen. The euro trades at US$1.3376, compared to US$1.3308 the prior day and USD$1.3414 the day before. The dollar trades at ¥82.62, compared to ¥82.66 Monday and ¥82.53 the prior day. U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.444% and 3.006%, respectively, compared to 0.421% and 2.920% Monday. The yield curve spread widened to +2.562% from +2.499% yesterday. 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 natural gas, higher precious metals, lower aluminum, higher copper, and higher agricultural prices.
U.S. news. Attention focuses on the tax compromise that will extend the Bush-era tax cuts in exchange for extending unemployment benefits. The compromised includes an estate tax deal. The reporting focus turns to consumer credit and confidence, on Wednesday to initial jobless claims, Thursday to the October trade balance, and Friday to the November budget statement.
Overseas news. The Euro-zone finance ministers’ meeting failed to produce an agreement on either a larger Euro-zone bailout fund or the issuance of Euro-zone bonds. In November, U.K. retail sales rose +0.7% over the prior year. October German factory orders increased +1.6% over the prior month, but missed estimates. Later this morning, Ireland will vote on its austerity budget, with the result in substantial doubt.
· C – U.S. Treasury exits its common stake, selling 2.4 billion shares at $4.35 (a -2%, or -$0.10, discount to closing price).
· Goldman Sachs Financial Services Conference today and tomorrow. Today’s presenters include: WFC, BAC, CYN, AXP, STI, FITB, PNC, and ZION
Monday’s equity markets. After three successive higher closes, markets gapped several points lower, perhaps on Fed Chairman Bernanke’s comments that the Fed would consider additional stimulus if the unemployment remains high. Indexes spent most of the day edging back toward the prior day’s closing values. Trading was slow, perhaps awaiting some clarification on taxes and next year’s treatment of dividends and capital gains. Late rallies pushed most indexes into positive territory, but after selling in the final minutes, only the NASDAQ held on to a gain and closed at another 2010 high, up 14.4% on the year. The DJI, SPX, and NYSE composite closed less than -0.17% lower. In December, the NYSE leads the other major indexes, up +4.17%, compared to the SPX, NASDAQ, and DJI, up +3.61%, +3.87%, and 3.24%, respectively. Impressively, segment strength has rotated to financials, rising +7.23% in December and outperforming for the first time since early April, prior to the SEC’s attack on Goldman Sachs. Market breadth was mildly negative. Market segments were mixed. Oil and gas, basic materials, and technology were the best performers. Consumer goods, utilities, and health care were the worst.
Market sentiment is improving. The latest week’s (December 3rd) AAII Investor Bullish Sentiment index rose +4.77% to 49.66 from 47.40 on November 25th. This is a bullish reading, but below the November 4th level, when markets were still in a confirmed uptrend. Sentiment indicators are highly variable, but this reading is probably best read as bearish.
Technical indicators are improving. Major indexes are at least +7.73% higher in 2010, but at 1223.12, the SPX closed -0.13% below its November 5th close, its high point this year. All major indexes closed above their 200-week moving averages. All major indexes closed above their respective 20-, 50-, 100-, and 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 positive, and the trend is strengthening. Short-term relative strength indicators moved into the upper end of a neutral range. Market volatility was unchanged. The VIX closed up +0.06% to 18.02 from 18.01 at Friday’s close.
Financials were mixed, with the XLF and BKX underperforming the SPX, while the KRX outperformed and gained on the day. The XLF, BKX, and KRX closed -0.17%, -0.37%, and +0.90%, respectively. While the broader indices have recovered most of their correction losses, financial stocks have not, with the BKX closing -17.4% below its April highs.
NYSE Indicators. Volume decreased -11.4% to 803.6 million shares, from 906.8 million shares Friday, and below the 1.038 billion share 50-day moving average. Volume declined for the 5th consecutive day. Market breadth was slightly negative, as was up versus down volumes. Advancing stocks lagged decliners by -42 (compared to +728 Friday), or 0.97:1. Up volume trailed down volume by 0.91:1.
3Q2010 Earnings. Earnings results have generally exceeded EPS and revenue expectations. Of the 470 S&P500 companies that reported earnings to date, 76% (356 of 466) beat operating EPS estimates, versus the historical average of 62%. Companies beat by an average of +6.4% (versus a historical average of +2%). EPS is up +31.4% over the prior year. Though challenged in the current operating environment, 374 companies (80%) reported increased revenues and 288 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 disappointed slightly, missing expectations by -0.30% on average.
Valuation. The SPX trades at 14.3x estimated 2010 earnings ($85.25) and 12.7x estimated 2011 earnings ($96.60), compared to 14.4x and 12.7x 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 +11.8%, +4.4%, and +5.4%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +13.3% and +28.7%, respectively.
Large-cap banks trade at a median 1.42x tangible book value and 13.4x 2011 earnings, compared to 1.41x tangible book value and 13.6x 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 +33.9% and expect 4Q2010 earnings to exceed 3Q2010 earnings by +24.6%. 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 lower volume, the SPX fell -1.59 points, or -0.13% to 1223.12. Volume fell -12.8% to 609.19 million shares from 698.87 million shares Friday, below the 832.77 million share 50-day moving average. For the 32nd consecutive day, its 50-day moving average closed above its 200-day moving average (1184.62 versus 1135.99, respectively). The SPX closed above its 200-week moving average (1187.64).
Markets opened lower after Fed Chairman Bernanke’s weekend interview explicitly allowed for additional stimulus, pushing funds into Treasuries. The SPX attempted a rally to the break-even line at 10am, but buying was tepid. The index found support near Thursday’s close (1221.5) and failed to significantly breach this level on each move down. Strength returned in the afternoon, gradually lifting the index to positive territory by 2:30pm where it hovered before a late day sell-off pushed stocks to close slightly lower on the day. The SPX closed +3.25% above its 50-day moving average (1184.62), closing above that average for the 65th consecutive day, and +7.67% above its 200-day moving average (1135.99). The SPX remained above its April-high closing level of 1217.28 and is -22 basis points below its yearly high of 1225.85 set on November 5th. The 50-, 100-, and 200-day moving averages rose while the 20-day average fell.
Technical indicators are positive. The SPX closed above its April highs for the third straight session. The directional momentum indicator is positive, with a stable trend strength. Relative strength fell to 61.81 from 62.63, at the lower end of an overbought range. Next resistance is at 1225.72; next support is at 1220.59.
BKX. On lower volume, the KBW bank index closed at 47.85, down -0.18 points, or -0.37%. The index closed +11.75% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -17.12% below its April 23rd closing high.
Financial stocks underperformed, and the regionals outperformed the large cap financials. BKX trading mirrored broader market activity, albeit downshifted with losses slightly greater in the financials. The afternoon rally took financials just back to break-even, and at intra-day highs, before the closing sell-off hit the sector. Despite the sell-off and negative close, financials still retained over half of their gains from Friday’s strong late-day rally. Volume was 95.48 million shares, down -23.2% from 124.35 million shares Friday, and below the 151.37 million share 50-day average.
Technical indicators are positive. The BKX closed above its 20-, 50-, and 100-day moving averages (46.48, 46.46, and 46.58, respectively), but again closed below its 200-day moving average (48.88) as it has since August 10th. The 50- and 200-day averages increased, while the 20- and 100-day averages trended lower. The 50-day moving average closed (by -2.42 points) below the 200-day moving average, as it has since August 16th. The directional movement indicator is positive, with a stable trend. Relative strength fell to 59.24 from 60.51, the upper end of a neutral range. Next resistance is 48.07; next support at 47.60.
Disclosure: I am Long C, GS, BAC, AXP, PNC, WFC.