Late Rally Leaves Markets Little Changed; FASB Gives in on Fair Value Accounting

This morning.  Equity futures are higher, building on a mixed Asian trade and a strong European share advance. Chinese stocks rallied after four consecutive lower closes, but on lower volume. Some attribute this morning’s better futures to the absence of any anti-business particulars in President Obama’s State of the Union address last night, but the strength may be better ascribed to expectations that the Fed’s FOMC, which reports this afternoon at 2:15 EST, will leave its support for QE2 unchanged. March SPX futures are at 1293.20, up +5.62 points after fair value adjustment.  Next SPX resistance is at 1294.60.  Next support is at 1284.41.   

 

Yesterday, markets staged an unusually strong, late rally to close mixed on increased volume overall. The Nasdaq and SPX closed fractionally higher, the DJI and NYSE composite were fractionally lower. Markets opened lower, and traded poorly until the last hour rally brought the major indexes back to, or nearly to par. At noon, FASB gave up on its decision to force banks to report all assets and liabilities at fair value.  Distribution days number 3 on the NASDAQ and NYSE.  The DJI and SPX have no distribution days in the past 25 trading days.  Markets are in a confirmed uptrend.

 

Overnight, the Nikkei, Hang Seng, and Shanghai closed mixed, -0.60%, +0.23%, and +1.17%, respectively.  On the SHCOMP, volume fell -12.7%. All market segments closed higher, with financials the 9^th worst performing, up +0.56%.  Industrials, technology, and consumer services were best. The Eurostoxx50, FTSE, and DAX are +0.79%, +1.35%, and +1.13%, respectively, with the FTSE’s advance noteworthy in light of yesterday’s news that the United Kingdom’s economy contracted in 4Q2010.  On the EuroStoxx, financials are the 9^th worst performing market segment, up +0.36%.

 

LIBOR trends remain unremarkable.  Overnight USD LIBOR is 0.23688%, unchanged since last Wednesday and down from 0.25188% at year-end.  USD 3-month LIBOR is 0.30438%, unchanged from Monday, and compared to 0.30281% at year-end.  In early trading, the dollar is slightly weaker against the euro, pound, and yen.  The euro trades at US$1.3693, compared to US$1.3681 Tuesday and US$1.3638 the prior day.  For the 5^th consecutive day, the euro closed above its 50-, 100-, and 200-day moving averages.  The dollar trades at ¥82.22, compared to ¥82.25 Tuesday and ¥82.53 the prior day.  Treasury yields are higher, with 2- and 10-year maturities yielding 0.633% and 3.371%, respectively, compared to 0.5576% and 3.328% Tuesday.  The yield curve spread narrowed to +2.738% compared to +2.752% 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 +2.89% on February 17, 2010.  Commodities are much rebounding from yesterday’s sharp losses, with higher petroleum but lower natural gas, mixed precious metals, lower aluminum and higher copper, and higher agricultural prices.

 

U.S. news.  The Fed FOMC meets Wednesday, with its report released at 2:15.  Thursday, the most recent week’s initial and continuing claims are released.  On Friday, 4Q2010 GDP revisions are released.

 

Overseas news.   In December, German import prices rose to the highest level in a year and at the fastest pace in over 29 years.  At today’s 30-year bond sale, Germany received bids for only €1.97 billion of bonds, less than the maximum sale amount of €2 billion.  Spain’s finance minister said the government will impose a 10% capital requirement on banks that cannot raise funds from private investors and depend on wholesale funding, greater than the 8% minimum level announced on Monday.  In Egypt, the government banned protests indefinitely after yesterday’s violent rallies and a smaller protest this morning. 

 

Company news/research:

 

·         LM – reports 4Q10 GAAP and operating EPS of $0. and $0.73, compared to estimates of $0.46

·         EWBC – reports 4Q10 GAAP and operating EPS of $0.22 and $0.31, compared to estimates of $0.29

·         RF – downgraded to market perform at Sanford Bernstein, price target dropped to $8 from $8.50

·         FITB – upgraded to neutral at JPMorgan, price target raised to $17 from $16

·         SBNY – upgraded to outperform at Macquarie, price target raised to $63 from $46

·         C – U.S. Treasury auctions the A and B warrants from TARP for $1.01 and $0.26 respectively. 

 

4Q2010 Earnings.  The quarter’s first earnings results have so far exceeded EPS and revenue expectations.  Of the 57 S&P500 companies that reported earnings to date, 74% (42 of the 57) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +7.1% (versus a historical average of +2%).  EPS is up +142.8% over the prior year.  Though challenged in the current operating environment, 40 companies (70%) reported increased revenues and 43 companies (75%) beat revenue estimates. 

 

With 17 of the 23 BKX members reporting, 76% (13 out of 17) beat operating EPS estimates.  Bank revenues have disappointed slightly, missing estimates by -1.0% on average.  Eleven banks (64%) reported increased revenues over the prior year’s quarter. 

 

Tuesday’s equity markets.  Stocks closed mixed, with the DJI and NYSE composite yielding minimally, while the SPX and Nasdaq posted small gains. Volumes were generally higher, though lower on the DJI. With all indexes at their intraday lows, Equities rallied late after comments on CNBC by Laszlo Birinyi, a well-regarded technical analyst and investment manager, stated his view that the SPX will double to 2,854 in 2013 (one has to admire his specificity). Telecommunications, technology, and consumer services were the best performers, closing at least +0.16% higher. Utilities, financials, and oil and gas were the worst performing market segments. Volatility rose through most of the day, but the VIX ended at 17.59, down -0.34% from 17.65 at the prior close. 

 

Major themes remain: 1) hawkish comments or actions from monetary authorities in all but the United States; 2) commodities weakness; 3) rotation toward high cap names; 4) reassertion of the fundamental trade, and abatement of the macro-trade; 4) the BRICs grow cold, as capital flows toward Europe and the United States. 

 

Technical indicators are generally positive. Markets are in a confirmed uptrend that began in early September, which after consolidating in November, has extended over the last several weeks.  After last week’s mixed results, there are indications that the uptrend is under pressure, especially as markets are unable to push through resistance.  Still, the trade in U.S. equity markets seems increasingly driven by fundamentals and less by the technicals, or the macro trade, as was so common in recent months.  Fundamentals are improving. 

 

All of the major indices closed above their respective 200-week and 20-, 50-, 100-, and 200-day averages. Markets remain in a bullish configuration, with the 50-day moving average above their respective 200-day moving averages. The relative strength indicator fell to 63.80 from 65.86 Monday, still near the top of a neutral range.  Investor sentiment remains elevated, with the January 20^th AAII at 50.70, down from 52.34 the prior week and from a high of 63.30 on December 23^rd.

 

Financial stocks closed mixed, with the XLF, BKX, and KRX -0.20%, -0.15%, and +0.54%, respectively, all well above their intraday lows.  While the broader indices are near two-year highs and have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -8.58% below its April 2010 highs and -35.8% below its best level of 82.55 in September 2008.

 

NYSE Indicators.  Volume rose +8.78% to 1.046 billion shares, from 961.93 billion shares Monday, and compares to a 990.3 million share 50-day moving average.  Market breadth was positive, but up volume lagged down volume.  Advancing stocks led decliners by +219 (compared to +1220 Monday), or 1.16:1.  Up volume led down volume by 0.64:1.

 

4Q2010 Earnings.  The quarter’s first earnings results have so far exceeded EPS and revenue expectations.  Of the 102 S&P500 companies that reported earnings to date, 74% (47 of the 102) 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 +89.5% over the prior year.  Though challenged in the current operating environment, 75 companies (74%) reported increased revenues and 80 companies (79%) beat revenue estimates. 

 

With 21 of the 24 BKX members reporting, 76% (16 out of 21) beat operating EPS estimates.  Bank revenues have disappointed slightly, missing estimates by -0.62% on average.  Fourteen banks (67%) reported increased revenues over the prior year’s quarter and 15 banks (71%) beat revenue estimates.

 

Valuation.  The SPX trades at 13.5x estimated 2011 earnings ($95.65) and 11.9x estimated 2012 earnings (revised up to $108.62 from $108.44), compared to 13.5x and 11.9x respective 2011-12 earnings yesterday.  The 10-year average median Price/Earnings multiple is 20.0x.  Since the beginning of 2010, analysts increased 2011 and 2012 earnings estimates by +3.4%, and +4.4%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +19.3% and +35.5%, respectively.

 

Large-cap banks trade at a median 1.48x tangible book value and 11.2x 2011 earnings, compared to 1.59x tangible book value and 11.2x 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%.  Analysts’ estimates for bank 4Q2010 earnings are 19.6% higher than were estimates for 3Q2010 earnings.  In 3Q2010, large-cap banks earned $13.78 (the sum of 31 banks’ operating EPS), compared to $5.32 in 3Q2009.  In 3Q2010, the BKX earned $0.71 per share, compared to -$1.24 per share a year earlier.

 

SPX.  On higher volume, the SPX rose +0.34 points, or +0.03% to 1291.18.  Volume rose +11.2% to 827.77 million shares from 744.40 million shares Monday, above the 778.32 million share 50-day moving average.  For the 67^th consecutive day, its 50-day moving average closed above its 200-day moving average (1241.84 versus 1154.56, respectively).  The SPX closed above its 200-week moving average (1182.51). 

 

The SPX opened lower and under 1290.  Another pre-10:00 rally brought the index back to break-even at 10:00, but the rally was quickly sold down to the 1287 level.  A second rally began at 10:30.  It was sold also, but more severely, and the SPX dropped to 1282 by 11:30.  Buyers bought the dip, and the index rebounded to the 1287 level by 12:30.  Trading relatively sideways through 2:00, another sell-off pushed the index down to its intra-day low of 1281.07 at 2:52 when a surprising and aggressive rally took hold.  The SPX staged a steep ascent through the 3:00 hour, and retook the break-even line at 3:57.  The intra-day high of 1291.26 came one minute later, and the index finished just below that high, but with gains for the day.  The index closed +4.10% above its 50-day moving average, closing above that average for the 99^th consecutive day, and +11.88% above its 200-day moving average.  The 20-, 50-, 100-, and 200-day moving averages rose.

 

Technical indicators are positive.  The SPX closed above its April highs for the 37^th straight session and above 1280 for the 9th straight session.  The directional momentum indicator is positive, with a declining trend.  Relative strength rose to 67.98 from 67.82, the higher end of a neutral range.  Next resistance is at 1294.60; next support is at 1284.41. 

 

BKX.  On higher volume, the KBW bank index closed at 52.98, down -0.08 points or -0.15%.  The index closed +24.66% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -7.54% below its April 23^rd closing high. 

 

Financials underperformed the market, and large-cap banks’ losses underperformed regionals’ gains.  Banks stocks opened flat and outperformed the broader markets early.  The BKX traded sideways near break-even through 11:00 even as the SPX lost ground.  Financials sold off at 11:00 with other sectors, and moved through first resistance of 52.74 by 11:15.  Finding support at 52.60 through 2:00, the BKX again traded lower to an intra-day low of 52.30 at 2:30.  The same 3:00 broader market rally lifted financials in trading’s final hour.  Trading ended before the BKX could retake its prior day’s closing level, and the index finished just below 53.  The index closed above 50 for the 25^th straight day.   Volume rose +9.07% to 138.89 million shares, down from 127.34 million shares Monday, and below the 162.75 million share 50-day average.

 

Technical indicators are mostly positive.  The BKX closed above its 50-, 100-, and 200-day moving averages (50.13, 48.39, and 49.07, respectively), closing above the 200-day average for the 32^nd straight session.  The index closed below its 20-day moving average (53.16) for the fourth time in five sessions.  The 20-, 50-, and 100-day averages increased while the 200-day decreased.  The 50-day moving average closed (by +1.05 points) above the 200-day moving average, closing above it for the 9^th straight day.  The directional movement indicator is positive, but narrow, and trend strength is declining.  Relative strength fell to 54.69 from 55.26, the middle of a neutral range.  Next resistance is 53.35; next support at 52.45.

 

Disclosure: I am long OTCPK:SBNY, C.