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Markets Shrug Off Mixed Jobs Report; Futures Point Higher

|Includes: Annaly Capital Management, Inc. (NLY)
This morning.  U.S. equity markets are in a confirmed uptrend, and futures are higher and strengthening in front of the January employment report. The SPX begins the day at 1307.10, just shy of last Tuesday’s multi-year high and at key resistance points of 1307 and 1315.  March SPX futures are at 1305.70, up +1.80 points after fair value adjustment.  Next SPX resistance is at 1312.19.  Next support is at 1298.42.
 
Thursday, equity markets spent most of the day lower, but rallied through early afternoon and staged a positive reversal in the final hour of trading. The DJI closed up +0.17% at a new multi-year high. Late in the day, the SPX traded above resistance at 1307, and closed at 1307.10, up +0.24%, but fractionally below Tuesday’s 1307.57 new multi-year high. The NYSE composite and Nasdaq closed up +0.20% and +0.16%, respectively. Volume increased for the first time this week.   At day’s end, market breadth was mildly positive. Market volatility declined for the 4th consecutive day.  Key resistance points remain 1307 and 1313 (the August 2008 pre-Lehman high).  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.
 
Asian equity markets are closed for the lunar new year.  In Europe, the Eurostoxx50, FTSE, and DAX are rising, up +0.33%, +0.31%, and +0.27%,  respectively.  On the EuroStoxx, financials are the best performer, up +0.95%.  Eurozone leaders are meeting today to overhaul their €440 billion financial stability facility, perhaps to permit purchase of government bonds. Sovereign debt spreads are mixed today, but have improved markedly since mid-January.
 
LIBOR trends remain unremarkable.  Overnight USD LIBOR fell to +0.23690% from 0.23700% Thursday, but down from 0.25188% at year-end.  USD 3-month LIBOR rose slightly to 0.31150%, from 0.31050%, and up compared to 0.30281% at year-end.  In early trading, the dollar is mixed, lower against pound, unchanged compared to the euro, and stronger compared to the yen.  The euro trades at US$1.3631, down from US$1.3634 Thursday and US$1.381129 the prior day.  For the 11th consecutive day, the euro closed above its 50-, 100-, and 200-day moving averages.  The dollar trades at ¥81.63, unchanged from ¥81.63 Thursday and down ¥81.55 the prior day.  Treasury yields are higher, with 2- and 10-year maturities yielding 0.721% and 3.563%, respectively, compared to 0.704% and 3.549% Thursday.  The yield curve spread narrowed to +2.842% compared to +2.845% 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 higher petroleum and natural gas, lower precious metals, mixed aluminum and copper, and mixed agricultural prices.
 
U.S. news and economic reporting.  This morning’s focus is on the January employment report, in which a +145K change is expected in private payrolls and an increase in the unemployment rate to 9.5%, from 9.4%.  The actual report disappointed from a jobs growth viewpoint, with the change in nonfarm payrolls only +36K, but better than expect manufacturing payrolls and a decline in the unemployment rate to 9.0%.
 
Overseas news.  Today, the two-day Euro-zone political leaders meeting concludes in Brussels.  In January, a measure of U.K. home prices rose, defying expectations of a decline. 
 
Company news/research:
  • NLY – reported 4Q10 core EPS of $0.60 compared to estimates of $0.65; book value rose to $15.33 from $15.07 in 3Q10.
  • Goldman Sachs upgraded the Eurozone banks, for the time since September 2009.
4Q2010 Earnings.  The quarter’s first earnings results have so far exceeded EPS and revenue expectations.  Of the 277 S&P500 companies that reported earnings to date, 73% (203 of the 277) 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 +41.0% over the prior year.  Though challenged in the current operating environment, 216 companies (78%) reported increased revenues and 197 companies (71%) 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.
 
Thursday’s equity markets. On slightly heavier volume, all the major indices reversed early losses and closed higher. The SPX closed up +0.25% at 1307.10, but couldn’t close convincingly  above resistance at that level. The DJI closed at 12,062.26, up 0.17% and at a fresh multi-year high. Despite the late rally, trading floors were relatively quiet as investors listened to Chairman Bernanke’s National Press Club speech and sought improved clarity on the import of developments in Egypt and elsewhere in the region. The ongoing themes were: 1) a bid on weakness, 2) little in the way of aggressive shorting into the rally, 3) improving company and economic fundamentals, and 4) capital inflows into equities. Yesterday’s ISM report provided new evidence of stronger U.S. economic expansion (59.4 versus the 57.2 estimate); also, the Investment Company Institute (NYSEARCA:ICI) reported a $7.89 billion of fresh cash into U.S. mutual funds for the week ended January 26th, for a 3rd consecutive week.
 
Technical indicators are generally positive. 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 their respective 200-day moving averages. New 52-week net highs were +255, well above its 10-day moving average of 152.70. The relative strength indicator closed at 65.64, up slightly from Wednesday’s close of 64.69, and still near the top of a neutral range.
 
Market Sentiment is positive and elevated. The most recent AAII bullish sentiment index (February 3rd) rose to 51.54, from 42.04 on January 27th, but below the recent high 63.60 the week ended December 23rd. Sentiment indexes are highly variable and often best regarded from a contrarian perspective.
 
All market segments ended higher, with consumer services, telecommunications, and consumer goods, the best performers. Oil and gas, industrials, and technology were the day’s worst performers. 
 
 
Financials trailed the broader markets through much of the day, but gained strength and ended better, with regional banks outperforming the large cap and money center firms.  The XLF, BKX, and KRX rose +0.03%, +0.24%, and +0.35%, respectively.  While the broader indices are have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -6.63% below its April 2010 highs and -34.5% below its best level of 82.55 in September 2008.
 
NYSE Indicators.  Volume rose +7.11% to 999.87 million shares, from 933.5 million shares Wednesday, and compares to a 994.6 million share 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +268 (compared to -197 Wednesday), or 1.19:1.  Up volume led down volume by 1.54:1.
 
Valuation.  The SPX trades at 13.6x estimated 2011 earnings ($96.01) and 12.0x estimated 2012 earnings ($108.92), compared to 13.6x and 12.0x 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 +3.8%, and +4.6%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($82.88) by +15.8% and +31.4%, respectively.
 
Large-cap banks trade at a median 1.58x tangible book value and 14.1x 2011 consensus earnings, compared to 1.56 tangible book value and 14.1x 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 operating 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 higher volume, the SPX rose +3.07 points, or +0.24%, to 1307.10.  Volume rose +7.6% to 768.96 million shares up from 714.45 million shares Wednesday, below the 776.78 million share 50-day moving average.  For the 74th consecutive day, its 50-day moving average closed above its 200-day moving average (1256.43 versus 1157.83, respectively).  The SPX closed above its 200-week moving average (1181.75). 
 
The SPX opened marginally lower.  The index traded at support levels near 1302 until 10:00, when a sharp sell-off sent the index below 1300 and to the intra-day low of 1294.83 at 10:15.  Buyers stepped in, quickly reversing momentum.  The index rallied through the morning’s remainder, and almost retook the break-even line by noon.   Equities traded sideways at 1302 through 2:15.  A small rally lifted stocks back to break-even and a second rally at 2:50 sent the index into positive territory and through first resistance.  The intra-day high of 1308.60 came at 3:43.  The index couldn’t hold above 1308 (a pre-Lehman benchmark level), but stayed above 1307 for the close.  The index closed +4.03% above its 50-day moving average, closing above that average for the 105th consecutive day, and +12.89% above its 200-day moving average.  The 20-, 50-, 100-, and 200-day moving averages rose.
 
Technical indicators are positive.  The SPX staged a positive reversal, closed above 1300 for the third consecutive day, closed above its April highs for the 44th straight session, and remained above its 20-day moving average.  The directional momentum indicator is positive, with a stable trend.  Relative strength rose to 65.06 from 63.90, the high end of a neutral range.  Next resistance is at 1312.19; next support is at 1298.42. 
 
BKX.  On higher volume, the KBW bank index closed at 54.11, up +0.13 points or +0.24%.  The index closed +25.90% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -6.63% below its April 23rd closing high. 
 
Financials matched the market’s performance, and regionals outrperformed large-cap banks.  The BKX opened flat and moved higher to 54.10 in trading’s opening minutes.  The index retraced gains by 9:45, and a volatile sell-off/rally/sharper sell-off sequence pushed the index below first resistance and to an intra-day low of 53.62 at 10:15.   The BKX staged a quick reversal to reclaim the break-even line at 10:45, but those gains were short lived.  The index fell back to support at 53.80 and traded sideways through 2:45.  A sharp rally brought the index into positive territory at 3:00.  The index reached an intra-day high of 54.21 at 3:43 before a small sell-off into the close.  The index closed above 50 for the 32nd straight day.   Volume rose +11.2% to 117.87 million shares, up from 105.97 million shares Wednesday, and below the 160.03 million share 50-day average.
 
Technical indicators are positive.  The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (53.36, 51.12, 48.89, and 48.97, respectively), closing above the 200-day average for the 39th straight session.  The 20-, 50-, and 100-day averages increased while the 200-day decreased.  The 50-day moving average closed (by +2.15 points) above the 200-day moving average, closing above it for the 16th straight day.  The 100-day moving average closed (by -0.09 points) below the 200-day moving average, signaling a cross early next week.  The directional movement indicator is positive, and with a stable trend.  Relative strength rose to 59.00 from 58.31, a neutral range.  Next resistance is 54.28; next support at 53.77.
 

Disclosure: I am long NLY.