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Markets Rebound on Fundamental Trade; Futures Point Higher

|Includes: BBT, CIM, COF, JPM, Annaly Capital Management, Inc. (NLY), WFC
This morning.  Equity futures are higher and improving, extending their rebound from Friday’s macro-driven selloff, as markets decide that Egyptian developments are less than catastrophic. March SPX futures are at 1289.70, up +7.08 points after fair value adjustment.  Next SPX resistance is at 1290.03.  Next support is at 1279.36.
Monday, equity markets returned to a fundamental trade, as investors bought Friday’s dip. The NYSE composite posted the best returns, rising +0.95%. Volumes were lower on all the major exchanges. Volatility declined slightly, with the VIX again below 20. The number of distribution days was unchanged, with 4 on the NASDAQ and NYSE, and one on the DJI and SPX in the past 25 trading days.
Overnight, the Nikkei, Hang Seng, and Shanghai closed higher, up +0.36%, +0.15%, and +0.30%, respectively.  The SHCOMP advanced for the 4th consecutive day, and its advance came despite a weaker than expected January PMI, which declined from the prior month to the lowest level in the past 5 months.  Volume declined -18.9%.  An intraday reversal on January 27th on heavy volume may have signaled an end to the correction that began last November; however, further monetary tightening is expected, though recent new property taxes and down payment requirements remove most short-term policy uncertainty.  In Europe, the Eurostoxx50, FTSE, and DAX are up +0.94%, +0.90%, and +0.89%, respectively, after 3 consecutive losing days.  Egypt-related concerns are diminishing.  On the EuroStoxx, financials are the 3rd best performer, up +1.12%.  Eurozone sovereign debt tightened significantly today.
LIBOR trends remain unremarkable.  Overnight USD LIBOR rose slightly to 0.23600% from 0.23531% Monday, but down from 0.25188% at year-end.  USD 3-month LIBOR is 0.31050%, up from 0.30438% Tuesday, and compared to 0.30281% at year-end.  In early trading, the dollar continues to shed the flight to quality trade and is weaker against the euro, yen, and pound.   The euro trades at US$1.3755, compared to US$1.3694 Monday and US$1.3611 the prior day.  For the 9th consecutive day, the euro closed above its 50-, 100-, and 200-day moving averages and appears overbought at these levels.  The dollar trades at ¥81.55, compared to ¥82.04 Monday and ¥82.12 the prior day.  Treasury yields are higher, with 2- and 10-year maturities yielding 0.593% and 3.414%, respectively, compared to 0.562% and 3.370% Monday.  The yield curve spread widened to +2.821% compared to +2.808% 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 mixed, with lower petroleum and natural gas, slight higher precious metals, much higher aluminum and copper, and mixed agricultural prices.
U.S. news and economic reporting.  At 10:00, December construction spending is released, accompanied by January ISM manufacturing and prices paid. 
Overseas news.  In January, China’s purchasing managers’ index declined more than expected but remained above the 50.0 expansionary threshold.  Also in January, China’s home prices rose +1%, the largest month-over-month increase since July.  January’s Euro-zone purchasing managers’ index rose more than expected while Germany’s unemployment declined to 7.4% from 7.5% for the month, compared to estimates of no change.  North and South Korea agreed to hold working-level military talks next week. 
Company news/research:
·         NLY – initiated at buy at Ladenburg, price target of $19
·         CIM – initiated at neutral at Ladenburg
·         JPM, WFC, BBT, COF – named best picks at Bernstein as recent bank sector outperformance swings risk-reward toward higher quality names.
·         The Morgan Stanley Financial Services Conference begins today with presentations from WFC, ZION, USB, RF, EWBC, PNC, and TCB.
4Q2010 Earnings.  The quarter’s first earnings results have so far exceeded EPS and revenue expectations.  Of the 194 S&P500 companies that reported earnings to date, 74% (144 of the 194) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +7.3% (versus a historical average of +2%).  EPS is up +47.0% over the prior year.  Though challenged in the current operating environment, 150 companies (77%) reported increased revenues and 140 companies (74%) beat revenue estimates. 
With all 24 BKX members reporting, 75% (18 out of 24) beat operating EPS estimates.  Bank revenues disappointed slightly, missing estimates by -0.59% on average.  Fifteen banks (63%) reported increased revenues over the prior year’s quarter and 17 banks (71%) beat revenue estimates.
Monday’s equity markets. On lower volume, all of the major indexes rallied to recover a portion of Friday’s Egypt-driven losses.  The NYSE composite led the major indexes with an advance of +0.95%, but all closed near their intraday highs.  Generally positive economic news flow and better-than-catastrophic news out of Egypt brought buyers back to the equity markets, as the macro-trade faded and recent more fundamental trends reasserted themselves.  After Friday’s spike, volatility declined modestly as the VIX declined -2.54% to end at 19.96, 20.04.  Shorting activity remains muted, according to trading desks.
Technical indicators are mixed. The DJI and SPX have tested but failed to move through resistance levels, suggesting a near-term market top.  The 5-month long market uptrend is under pressure.  All of the major indexes closed above their respective 200-week and 20-, 50-, 100-, and 200-day moving averages.  Markets are in a bullish configuration, with the 50-day moving averages above respective 200-day moving averages. New 52-week net highs declined to +96, below 136.7 10-day moving average.  The relative strength indicator closed at 57.88, just up from Friday’s close of 52.26, and still in the neutral range.  The latest AAII survey of investor sentiment declined to 42.04% (January 27th) from 50.70 the prior week. 
Most market segments closed higher, with oil and gas, basic materials, and financials the best performers, up at least +0.97%.  Health care, consumer goods, and consumer services were the weakest segments.
Financials were mixed, with a substantial divergence between the large cap and small regional banks, as the XLF and BKX advanced +0.92% and +1.13%, respectively, while the KRX lost +0.36%.  While the broader indices are have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -8.54% below its April 2010 highs and -35.8% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume fell -9.42% to 1.199 billion shares, from 1.323 billion shares Friday, and compares to a 998.5 million share 50-day moving average.  Market breadth was positive,  and up volume led down volume.  Advancing stocks led decliners by +1155) compared to -2077 Friday), or 2.22:1.  Up volume led down volume by 2.19:1.
Valuation.  The SPX trades at 13.5x estimated 2011 earnings ($95.59) and 11.9x estimated 2012 earnings ($108.40), compared to 13.3x and 11.8x respective 2011-12 earnings Friday.  The 10-year average median Price/Earnings multiple is 20.0x.  Since the beginning of 2010, analysts increased 2011 and 2012 earnings estimates by +3.3%, and +4.1%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($82.88) by +15.3% and +30.8%, respectively.
Large-cap banks trade at a median 1.54x tangible book value and 13.7x 2011 consensus earnings, compared to 1.52 tangible book value and 13.7x 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 +30.5%.  In 4Q2010, large-cap banks earned $17.92 (the sum of 31 banks’ operating EPS), compared to $16.21 in 3Q2010.  In 4Q2010, the BKX earned $2.99 per share, compared to $1.42 per share in 3Q2010. 
SPX.  On lower volume, the SPX rose +9.78 points, or +0.77%, to 1286.12.  Volume fell -8.9% to 932.36 million shares, from 1.023 billion shares Monday, above the 781.15 million share 50-day moving average.  For the 71st consecutive day, its 50-day moving average closed above its 200-day moving average (1249.94 versus 1156.29, respectively).  The SPX closed above its 200-week moving average (1181.64). 
Yesterday’s action was practically the inverse of Friday’s.  The SPX opened higher above 1280.  Early trading lacked conviction, and the intra-day low of 1277.45 came at 10:00.  A rally took hold at 10:15.  The SPX broke successively higher, through 1282 by 11:00 and through 1284 after noon.  The index reached an intra-day high of 1287.17 at 12:30.  Buying took a breather, and the index traded flat to down through 2:45.  The index rallied in trading’s final hour and retook 1286 just before the closing bell.  The index closed +2.89% above its 50-day moving average, closing above that average for the 102nd consecutive day, and +11.23% above its 200-day moving average.  The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are mostly positive.  The SPX closed above its April highs for the 41st straight session, above 1280 for the 12th time in 13 sessions, and moved back above its 20-day moving average.  The directional momentum indicator is positive marginally, with a declining trend.  Relative strength rose to 57.43 from 52.13, a neutral range.  Next resistance is at 1290.03; next support is at 1279.36. 
BKX.  On lower volume, the KBW bank index closed at 53.00, up +0.59 points or +1.13%.  The index closed +23.31% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -8.54% below its April 23rd closing high. 
Financials outperformed the market, and large-cap banks’ gains outperformed regionals’ losses.  BKX trading mirrored the broader markets.  The index opened higher and traded sideways through 10:00.  The 10:00 rally persisted longer in financials, and the BKX reached its intra-day high of 53.14 at 1:00.  The index retreated below 53.00 by 1:30, making three afternoon rallies above 53.00, at 3:00, 3:45 and at the closing bell.  The index closed above 50 for the 29th straight day.   Volume fell -28.9% to 128.45 million shares, down from 180.74 million shares Friday, and below the 161.29 million share 50-day average.
Technical indicators are mostly positive.  The BKX closed above its 50-, 100-, and 200-day moving averages (50.62, 48.67, and 49.01, respectively), closing above the 200-day average for the 36th straight session.  The BKX closed below its 20-day moving average (53.26) for the fifth time in six sessions.  The 20-, 50-, and 100-day averages increased while the 200-day decreased.  The 50-day moving average closed (by +1.61 points) above the 200-day moving average, closing above it for the 13th straight day.  The directional movement indicator is positive, but narrow, and trend strength is declining.  Relative strength rose to 53.80 from 50.01, a neutral range.  Next resistance is 53.29; next support at 52.57.