Futures Higher as Asia Re-opens, Europe Equities Advance on Strong Earnings

Feb. 07, 2011 8:46 AM ETRF, NLY
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Long/Short Equity, Short-Term Horizon, Medium-Term Horizon

Contributor Since 2008

Gary Townsend - Founding member and Chairman, GBT Capital Management, LLC, a macro long/short fund based in Chevy Chase, Maryland. Also, 2007-2013, a founding partner, CEO and Portfolio Manager of Hill-Townsend Capital LLC, a long/short equity financial sector fund. Mr. Townsend has 35 years banking, regulatory, and investment experience. He started his business career in 1978, as a consultant and advisor on anti-dumping trade issues primarily to foreign manufacturers based in Asia. In 1982, he began a 15 year career as a U.S. government banking regulator. In 1990, he was recruited to build out a new, independent federal regulatory agency, the Federal Housing Finance Board, regulator of the Federal Home Loan Bank System. As Chief Examiner and Director of Supervision and Examination, Mr. Townsend organized and implemented supervisory examinations of the 12 FHLBanks and Office of Finance with particular emphasis on their funding activities, use of derivatives, safety and soundness and regulatory compliance. In 1998, Townsend joined FBR Capital Markets as a sell-side analyst, applying his banking and regulatory experience to the investment analysis of commercial banks of all market capitalizations. In 2007, Forbes.com named him as "Best Brokerage Analyst" for commercial banks; also Starmine ranked him the #2 earnings estimator (out of 109 analysts) and in the top 10% of analysts for stock picking and earnings accuracy. Townsend left FBR in November 2007 to launch Hill-Townsend Capital LLC. He holds a CPA designation (1999) and a MBA from George Washington University (1979).
This morning.  Equity markets are in a confirmed uptrend, and futures are higher and strengthening as Asian equity markets re-opened and European bourses advanced on strong earnings reports.  The SPX begins the day at 1310.87, just shy key resistance at 1313.  March SPX futures are at 1311.70, up +4.03 points after fair value adjustment.  Next SPX resistance is at 1314.02.  Next support is at 1304.69.

Friday, equity markets shrugged off a disappointing U.S. employment report for January, reversed early losses and ended mostly higher. With a +0.56% gain, the Nasdaq turned in the day’s best performance, followed by the SPX and then DJI (+0.29% and +0.255, respectively , while the NYSE composite ended with a fractional -0.01% loss, all on lower volume. The Nasdaq, SPX, and DJI ended at fresh multi-year highs. At day’s end, market breadth was mildly negative, though up volume exceeded down volume. Market volatility declined for the 5th consecutive day.  On the SPX, the next key resistance point is 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.
After their extended lunar new year holiday, some have re-opened and Asian equity markets ended mixed. The Nikkei closed up +0.46%, but in its worst post-new year showing since 2008, the Hang Seng closed down -1.49% on concerns that Chinese monetary policy would be tightened further, hurting real estate values. The Shanghai exchanges re-open tomorrow. In Europe, the Eurostoxx50, FTSE, and DAX are rising, up +0.73%, +0.75%, and +0.47%,  respectively.  The advances seem tied to strong earnings reports. On the EuroStoxx, financials are up +0.65%, but are the 3rd worst performing market segment.  European stocks have recaptured their September 2008 levels. Eurozone leaders set a March 25th “deadline” to complete their plan to address sovereign debt concerns. Sovereign debt spreads are mixed today, but have improved markedly since mid-January.
LIBOR trends remain unremarkable.  Overnight USD LIBOR rose to +0.23740% from +0.23690% Friday, but down from 0.25188% at year-end.  USD 3-month LIBOR rose slightly to 0.31200% from 0.31150%, and up compared to 0.30281% at year-end.  In early trading, the dollar is slightly better against the euro and yen, and unchanged against the pound. The euro trades at US$1.3550, down from US$1.3581 Friday and US$1.3634 the prior day.  For the 12th consecutive day, the euro closed above its 50-, 100-, and 200-day moving averages.  The dollar trades at ¥82.35, up from ¥82.18 Friday and down ¥81.63 the prior day.  Treasury yields are higher, with 2- and 10-year maturities yielding 0.769% and 3.656%, respectively, compared to 0.744% and 3.636% Friday.  The yield curve spread narrowed slightly to +2.887% compared to +2.892% 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 higher, with higher petroleum but lower natural gas, mixed precious metals, higher aluminum and copper, and higher agricultural prices.
U.S. news and economic reporting.  This morning’s news flows are light, but heavy up tomorrow with the NFIB small business optimism and IBD/TIPP economic optimism reports for January and February, respectively. By the end of this week, the Treasury will release a proposed plan to “reform” U.S. mortgage systems and operations.
Overseas news.  In February, Euro-zone investor sentiment increased more than expected and hit the highest level since September of 2007.  Today, India raised its 2011 economic growth forecast to +8.6% from +8.5%.  European political leaders closed last week’s summit without an agreement on restructuring the bailout fund but set a deadline of March 25th to do so.   Egypt’s opposition parties met with Vice President Sulieman and discussed installing a transitional government until the September elections take place. 
Company news/research:
·         None
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.
Friday’s equity markets. Led by the Nasdaq, markets ended mostly higher on weaker volume. The Nasdaq, SPX, and DJI closed +0.56%, +0.29%, and +0.25% higher and set new multi-year highs. The NYSE composite closed -0.01% lower, just below the prior day’s best close since June 2008. The January employment report dominated news flow, but the mixed report (disappointing new jobs, but lower unemployment rate) seemed largely ignored. The markets were positive but cautious with investors focused on earnings and overall positive U.S. economic news while mindful of the unrest in Egypt and the possibility of the effects within the region. Most trading desks reported opportunistic buying and a dearth of new short selling indicating that investors still see value in specific names. The Institute for Supply Management-Chicago Inc. (ISM) said its business barometer rose to 68.8 last month.  A figure greater than 50 signals expansion within the economy.  Treasuries fell for a 5th day and the dollar strengthened on the unemployment news. The VIX continued its week-long descent, ending -18.5% lower on the week, closing at 15.93, its lowest point since January 18th.
Equities ended up for the week, with the DJI closing above 12,000 for the first time since June 2008, up 2.3% for the week,  after the previous Friday’s sell-off. The SPX closed above 1300 for the first time since August 2008, up 2.7% for the week.  
Technical indicators were positive. The DJI and SPX both broke through 12,000 and 1300, respectively, and held those levels.  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. The NYSE 52-week net highs were +178, above its 10-day moving average of 169.50. The AAII bullish indicator closed at 51.54 (February 3rd), from 42.04 on January 27th, but below the recent high of 63.60 the week ended December 23rd.  The relative strength indicator closed the week at 65.48, down slightly from 65.64 on Thursday and near the top of the neutral range.
Market segments closed mixed, with technology, consumer goods, and consumer services the best performers. Basic materials, oil and gas, and utilities were the worst performers, ending at least -0.08% lower on the day.  For the week, commodity producers rose the most among the SPX groups, rallying +4.6%. 
Financials were among the worst performing market segments, though regional banks outperformed the large-caps, with Regional Financial (RF) turning in a remarkable +4.12% gain on the day. The XLF, BKX, and KRX were mixed, with the XLF falling -0.05%, while the BKX and KRX rose +0.06% and +0.28%, respectively.  For the week, financials performed well, with the XLF, BKX, and KRX up +2.2%, +3.3% and +1.1% respectively.  While the broader indices are have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -6.57% below its April 2010 highs and -34.4% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume declined -7.94% to 920.44 million shares, from 999.87 million shares Thursday, and compares to a 992.6 million share 50-day moving average.  Market breadth was slightly negative, though up volume led down volume.  Advancing stocks lagged decliners by -7 (compared to +268 Thursday), or 1.00:1.  Up volume led down volume by 1.08:1.
Valuation.  The SPX trades at 13.7x estimated 2011 earnings ($96.00) and 12.0x estimated 2012 earnings (raised to $109.02 from $108.92), compared to 13.6x and 12.0x 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 +3.8%, and +4.7%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($82.88) by +15.8% and +31.5%, respectively.
Large-cap banks trade at a median 1.59x tangible book value and 14.2x 2011 consensus earnings, compared to 1.58 tangible book value and 14.1x 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 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 lower volume, the SPX rose +3.77 points, or +0.29%, to 1310.87, a level last seen in June 2008, well before Lehman Brothers’ collapse and Fannie/Freddie’s forced conservatorship.  Volume fell -8.6% to 702.78 million shares, down from 768.96 million shares Thursday, below the 774.30 million share 50-day moving average.  For the 75th consecutive day, its 50-day moving average closed above its 200-day moving average (1259.03 versus 1158.34, respectively).  The SPX closed above its 200-week moving average (1181.77). 
The SPX opened flat.  As investors digested January’s labor report, equities fluctuated between gains and losses.  A 10:30 sell-off sent the index to its intra-day low of 1301.67 at 11:00.  Buyers bought the dip, and the SPX rallied back to break-even at 1:15.  The index traded between 1307 and 1309 through 3:00 when a closing bell rally lifted the SPX above 1310 at 3:30.  The index set its intra-day high of 1311.00 at 3:49.  The index closed +4.12% above its 50-day moving average, closing above that average for the 106th consecutive day, and +13.17% above its 200-day moving average.  The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are positive.  The SPX set a new multi-year high, closed above 1300 for the fourth consecutive day, and closed above its April highs for the 45th straight session.  The directional momentum indicator is positive, with a declining trend.  Relative strength rose to 66.48 from 65.06, the high end of a neutral range.  Next resistance is at 1314.02; next support is at 1304.69. 
BKX.  On lower volume, the KBW bank index closed at 54.14, up +0.03 points or +0.06%.  The index closed +25.97% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -6.57% below its April 23rd closing high. 
Financials underperformed the market, and large-cap banks underperformed regionals.  The BKX opened lower and sold off quickly to an intra-day low of 53.69 at 9:48.  In the morning, the index attempted two rallies to the 54.00 level, both of which were sold.  The index trade between 53.90 and 54.00 from noon through 3:00, when the broader market rally lifted financials above 54.00 and into positive territory at 3:30.  The BKX set an intra-day high of 54.20 at 3:35.  A modest sell-off into the closing bell left the index with minimal gains for the day.  The index closed above 50 for the 33rd straight day.   Volume fell -8.7% to 107.69 million shares, down from 117.87 million shares Thursday, and below the 159.07 million share 50-day average.
Technical indicators are positive.  The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (53.40, 51.32, 48.95, and 48.96, respectively), closing above the 200-day average for the 40th straight session.  The 20-, 50-, and 100-day averages increased while the 200-day decreased.  The 50-day moving average closed (by +2.36 points) above the 200-day moving average, closing above it for the 17th straight day.  The 100-day moving average closed (by -0.003 points) below the 200-day moving average, signaling a cross after today’s close.  The directional movement indicator is positive, and with a stable trend.  Relative strength rose to 59.16 from 59.00, a neutral range.  Next resistance is 54.28; next support at 53.77.
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