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U.S. Equity Futures Moderately Lower; Markets Still In Correction

|Includes: BAC, CBRE Group, Inc. (CBRE), GNW, MMC, XL
This morning.  After fair value adjustment (-2.12), U.S. equity futures are moderately lower and trending lower. U.S. equity markets are in correction.  Markets continue their focus on any new developments in Japan, especially regarding serious problems in nuclear power plants in the tsunami-stricken Miyagi prefecture. Remarkably, Asian markets closed mixed, though Japanese equity markets closed much lower. European markets are modestly lower.  Middle East developments were constrained over the weekend, with some activity in Bahrain. According to news reports, Saudi military intervened in Bahrain today. The SPX opens at 1304.28, -2.88% below its February 18th post-Lehman high.  March SPX futures are at 1292.30, down -6.78 points after fair value adjustment.  Next SPX resistance is at 1311.09.  Next support is at 1294.73.
Despite Japan’s geophysical and human tragedy, which commenced just minutes before the close of Asian markets, Friday’s U.S. equity markets shook off some early weakness and closed moderately higher, though on lower volume. Market breadth was positive. Volatility declined slightly. The U.S. dollar weakened.  U.S. Treasury yields declined. U.S. equity markets are in correction.  Market corrections typically end on an intraday reversal on increased volume, when confirmed in subsequent trading.
World equity markets are mixed.  In Asia, the Nikkei and Hang Seng closed -6.18% and +0.41%, respectively.  The Shanghai composite rose +0.13%, on lower volume.  On February 25th, the SHCOMP confirmed a new uptrend, and while it sustained a distribution day on March 3rd, there were none this past week, despite Friday’s regional disaster. In Europe, equity indexes are moderately lower, but off intraday lows.  The Eurostoxx50, FTSE, and DAX are down -0.41%, -0.34%, and -1.20%, respectively.  On the EuroStoxx, financials are the best performing market segment, up +1.31%, after announcement of an expanded sovereign debt support plan for the region’s most indebted nations.
LIBOR trends remain unremarkable.  Overnight USD LIBOR is lower at 0.21350%, compared to 0.21550% the prior day and compares to 0.25188% at year-end.  USD 3-month LIBOR is lower at 0.30900%, compared to 0.21550% the prior day and down from 0.30950% at year-end.  In early trading, the dollar is stronger against the yen, but weaker against the euro and pound.  The dollar has trended lower since last June and now trades well below its 50-, 100-, and 200-day moving averages.  The euro trades at US$1.3963, compared to US$1.3903 Friday and US$1.3798 the prior day.  The euro trades above its 50-, 100-, and 200-day moving averages.  The dollar trades at ¥81.84, unchanged from Friday, and compares to ¥82.98 the prior day.  Treasury yields are higher, with 2- and 10-year maturities yielding 0.601% and 3.378%, respectively, compared to 0.641% and 3.402% Thursday.  The yield curve spread widened to +2.777% compared to +2.761% 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 +2.889% on February 3, 2011.  Commodities prices are generally lower, with lower petroleum, but slightly higher natural gas, higher precious metals, but lower aluminum and copper, and lower agricultural prices.
U.S. news and economic reporting.  Economic reporting is light today, picking up tomorrow with March Empire manufacturing, importing pricing, TIC flows, and the FOMC rate decision at 2:15.
Overseas news.  Friday’s Euro-zone leaders’ summit reached multiple agreements to increase the scope and flexibility of the region’s bailout fund, including increasing the fund’s lending capacity, allowing the fund to operate in the primary market, cutting Greece’s lending rate by 100 basis points and increasing the country’s repayment term to 7 years from three, and acknowledging the need to cut lending rates in general.  This weekend, the Arab League endorsed a no-fly zone for Libyan air space.  Libyan forces loyal to Colonel Gadhafi retook one opposition-control city and were attacking the rebel stronghold of Benghazi.  Reports indicate Saudi Arabian troops have entered Bahrain to help quell unrest.  Oman’s sultan surrendered some powers to a partially elected council in response to ongoing protests.  In February, India’s inflation rate rose 8.31% over last year, above expectations and the prior month’s increase.  On Friday, Moody’s warned that the Japanese earthquake’s and tsunami’s devastation may have brought the country closer to an economic “tipping point.”
Company news/research:
·         BAC – a website group similar to Wikileaks plans to release inside company emails that it says will reveal fraud and corruption
·         BAC – positive comments in Barron’s following the company’s investor day presentations
·         XL – positive comments in Barron’s
4Q2010 Earnings.  The latest quarterly earnings results have exceeded EPS and revenue expectations.  Of the 475 S&P500 companies that reported earnings to date, 71% (337 of the 475) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +5.3% (versus a historical average of +2%).  EPS is up +37.1% over the prior year.  Though challenged in the current operating environment, 366 companies (77%) reported increased revenues and 312 companies (66%) beat revenue estimates.  In the fourth quarter of 2010, the SPX earned $22.47 per share, a +4.9% and +28.3% increase over 3Q10 and 4Q09 EPS of $21.42 and $17.51, respectively.
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.  In the fourth quarter of 2010, the BKX earned $0.93 per share, a +31.0% increase over 3Q10 EPS of $0.71, and compared to 4Q09 EPS of -$0.52.    
Friday’s equity markets. After yesterday’s dramatic sell-off, markets were able to rebound slightly on less volume. We began the day with news from Japan concerning a devastating earth-quake and this set the tone for what could have been a follow through day of selling. Instead, the markets began on their lows and slowly rallied throughout the day to close near their highs as the price of oil fell to $101.16 due to weakened demand after the refineries in Japan were forced to close. The DJI, SPX, NYSE and Nasdaq all closed higher, up +0.50%, +0.71%, +0.59%, and +0.54%, respectively.  Investors continue to grapple with macro issues such as the Middle East, the price of oil and the continuing global economic recovery and a lack of corporate news domestically.
The macro issues are what have been driving the direction of the markets over the past week. After Thursday’s percentage loss, the SPX was down -1.26% for the week ended March 11th.  This has mostly tracked issues in the Middle East and the price of oil and has not been fundamentally based. Economically, last week we saw a positive consumer credit report (+$5.01B), a growth in mortgage applications (+15.5%), and an inline report for initial jobless claims(+397K), continuing claims (3771K) and advance retail sales (1.00%) which all point towards a steadily growing U.S. economy. Oil was the wild card this week, trading at an average of $103.74 for the week and has some investors convinced that continued high oil prices could stall the recovery globally.
Technical indicators were generally weak on Friday.  The SPX opened on its low of 1291.99, which was below the 1294 support level that investors had been watching. The SPX snapped back quite smartly and ended the day at 1304, above the 50-day moving average.  All the major indexes closed the week below their 20-day moving average. The Nasdaq closed below its 50-day moving average, while the DJI, SPX and NYSE were above the average. All of the indexes closed above their 200-week, 100-, and 200-day moving average.  The Bloomberg NYSE new net highs were -10 for Friday versus 134 on Thursday. This is the first negative reading of new net highs since November 16th, 2010. The relative strength indicator closed at 46.11, above Thursday’s reading of 43.04, near the lower end of a neutral range.
All market segments save one were positive today. Oil and gas, basic materials, and industrials lead the way up and telecommunications was the only negative segment, off -0.55%.
Financials were mixed, led by CBG, MMC, and GNW, up +5.81%, +3.66%, and +3.09% respectively.  The XLF and BKX were positive, up +0.67% and +0.96%. The KRX was the laggard off -0.26% with 17 issues up and 32 issues down.  The XLF, BKX, and KRX are all below their 20- and 50-day moving averages, but above their 100- and 200-day average.  While the broader indexes have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -9.31% below its April 2010 high and -36.3% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume fell -17.9% to 919.9 billion shares, from 1.120 billion shares Thursday, 0.89x the 50-day moving average.  Market breadth switched to positive, for the first time since Tuesday. Up volume led down volume by a large margin.  Advancing stocks led decliners by +804 (compared to -2118 Thursday), or 1.74:1.  Up volume led down volume by 3.91:1.
Valuation.  The SPX trades at 13.5x estimated 2011 earnings ($96.68) and 11.9x estimated 2012 earnings ($109.75), compared to 13.4x and 11.8x 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 +4.5%, and +5.4%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +14.0% and +29.5%, respectively.
Large-cap banks trade at a median 1.54x tangible book value and 12.9x 2011 consensus earnings, compared to 1.54x tangible book value and 12.9x 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 and 2012 BKX earnings to exceed 2010 operating earnings by +27.3% and 71.6%, respectively. 
SPX.  On lower volume, the SPX rose +9.17 points, or +0.71%, to 1304.28.  Volume fell -18.9% to 725.54 million shares, down from 895.18 million shares Thursday and below the 803.83 million share 50-day moving average.  For the 99th consecutive day, its 50-day moving average closed above its 200-day moving average (1301.75 versus 1179.26, respectively).  The SPX closed above its 200-week moving average (1177.64). 
The SPX opened lower, but with positive momentum.  The index set its intra-day low of 1291.99 at the open.  The index rallied to positive territory at 9:45 and fluctuated between narrow gains and losses until 11:20.  A rally took the index decisively into positive territory and the SPX crossed 1300 at 11:45.  Momentum faded at 12;20 with the index at 1303, and gains retraced to just under the 1300-level.  Buyers quickly lifted stocks back above 1300, and the index commenced a second rally that lifted it through the afternoon.  The SPX set its intra-day high of 1308.25 at 3:30.  Profit taking hit the index into the close.  The index retook its 50-day moving average, closing +0.19% above that average.  The SPX closed +10.60% above its 200-day moving average.  The SPX closed below its 20-day moving average (1320.17) for the fourth straight session.  The 20-day average decreased. 
Technical indicators have turned negative.  The index closed above its April 2010 highs for the 69th straight session.  The directional momentum indicator is negative, and the trend is increasing.  Relative strength rose to 47.22 from 43.46, a neutral range.  Next resistance is at 1311.09; next support is at 1294.73. 
BKX.  On lower volume, the KBW bank index closed at 52.55, up +0.50 points, or +0.96%.  Volume fell -16.9% to 108.07 million shares, down from 130.12 million shares Thursday and below the 140.56 million share 50-day average.  The index closed +22.27% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -9.32% below its April 23rd closing high. 
Financials outperformed the market, and large-cap banks’ gains outperformed regionals’ losses.  The BKX opened lower, setting its intra-day low of 51.95 at the opening bell.  Financials quickly rallied into positive territory and reached 52.45 by 9:55.  Gains retraced back to breakeven, but an 11:20 rally lifted the index back up to 52.40 at 11:45.  The BKX held this level until a 1:15 rally lifted financials up to their intra-day high of 52.73 at 2:30.  Momentum faded into the day’s end, but financials held on to most of their gains. 
Technical indicators turned negative.  The index closed above 50 for the 57th straight day.  The BKX closed above its 100- and 200-day moving averages (50.71, and 49.02, respectively), closing above the 200-day average for the 64th straight session.  The index closed below its 20- and 50-day moving averages of 53.54 and 53.60, closing below them for the 13th and 9th straight days, respectively.  The 20- and 50-day moving averages fell and the 20-day crossed below the 50-day.  The 50-day moving average closed (by +4.58 points) above the 200-day moving average for the 40th straight session, but the divergence contracted.  The 100-day moving average closed (by +1.69 points) above the 200-day moving average for the 23rd straight session, with the positive divergence still expanding.  The directional movement indicator is negative, and the trend is stable.  Relative strength fell to 45.64 from 42.20, a neutral range.  Next resistance is 52.88; next support at 52.08.