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Futures Mixed, Improving Despite Japan, Bahrain

|Includes: AFL, BBT, BK, CBRE, Capital One Financial Corporation (COF), HIG, JPM, PNC, STT, USB, WFC
This morning.  Asian markets rebounded from the prior day’s sell-off, despite troubling headlines regarding Japan’s Fukushima Daiichi nuclear complex. An uncontained nuclear event suggests the near-permanent loss of productive assets in Japan’s northeast, and a corresponding reduction in Japan’s potential GDP.  Due to Bahrainian developments, where yesterday martial law was declared, European equities are moderately lower. Gadhafi continues to progress in his civil war.  Commodity prices are higher. After a fair value adjustment of +1.47 points, June SPX equity futures are at 1274.40, off -0.09%, or -2.07 points.  The SPX opens at 1281.87, -4.55% below its February 18th post-Lehman high and -1.62% below its 50-day moving average.  Next SPX resistance is at 1293.18.  Next support is at 1265.84.
Tuesday, U.S. equity markets closed at least -1.12% lower on higher volume, but virtually all the day’s losses came in the first six minutes of the day’s trade (when the SPX found support at 1261, just above its 100-day moving average), and volume strengthened as the market valuations rebounded through the day. The SPX rebounded to 1288.46 intraday, but lost some ground in the final quarter-hour. Market breadth was negative.  As expected, volatility spiked initially, but declined through the morning and trended sideways through the afternoon.  The U.S. dollar strengthened and then gave up all its gains. U.S. Treasury yields fell. 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 ended higher in Asia, but are trading mixed in Europe. In Japan, the Nikkei rebounded +5.68% after the prior day’s plunge. In China, the Hang Seng and Shanghai composite closed +0.10% and +1.19%, respectively.  On the SHCOMP, volume fell -15.6%.  The SHCOMP’s uptrend is under pressure.  In Europe, equity indexes initially rose, traded lower, but are now above their intraday lows.  The Eurostoxx50, FTSE, and DAX are down -0.57%, -0.60%, and +0.08%, respectively.  On the EuroStoxx, financials are the worst performing market segment, down -1.15%.
LIBOR trends remain unremarkable.  Overnight USD LIBOR is unchanged at 0.21150%, compared to 25188% at year-end.  USD 3-month LIBOR is unchanged at 0.30900% and compares to 0.30950% at year-end.  In early trading, the dollar is stronger against the euro, pound, and yen.  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$1.3938, compared to US$1.3998 Tuesday and US$1.3992 the prior day.  The euro trades above its 50-, 100-, and 200-day moving averages.  The dollar trades at ¥80.68, compared to ¥80.72 Tuesday, and compares to ¥81.63 the prior day.  Treasury yields are lower, with 2- and 10-year maturities yielding 0.593% and 3.290, respectively, compared to 0.601% and 3.303% Tuesday.  The yield curve spread narrowed to +2.697% compared to +2.702% 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 higher, with higher petroleum, natural gas, precious metals, but lower aluminum and lower copper, and higher agricultural prices.
U.S. news and economic reporting.  At 8:30, economic reporting begins with February housing starts and building permits, producer prices, and 4Q2010 current account balance.
Overseas news.  At Japan’s Dai’ichi nuclear reactor plant, radiation levels continue to spike and decline and the government said a second reactor’s containment facility may have ruptured.  In Bahrain, violence escalated and five people were killed as Gulf Cooperation Council troops cleared out a central area where protesters congregated.  Today, Bahrain closed its stock market following the escalating unrest.  Today, Moody’s downgraded Portugal’s sovereign debt rating by two notches to A3, a move which the Portugese finance minister called “expected.”  In January, China’s leading economic indicators rose +0.3% over the prior month. 
Company news/research:
·         BBT – upgraded to buy at Deutsche Bank, price target increased to $31 from $28
·         JPM, WFC, PNC, USB, STT, and BK – named as most like to increase dividends after stress tests conclude, according to Jeffries 
4Q2010 Earnings.  The latest quarterly earnings results have exceeded EPS and revenue expectations.  Of the 476 S&P500 companies that reported earnings to date, 71% (338 of the 476) 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.    
Tuesday’s equity markets. On heavier volume, the major indexes closed lower, but losses were concentrated in the session’s early minutes, and through the day’s remainder, equities traded higher off these early session lows.  Pre-market activity looked bleak, with futures indicating the Dow down -250 points after a Japanese nuclear plant  released radiation.  The Nikkei’s two day slide of -16 percent spurred selling around the globe. The DJI, Nasdaq, NYSE and SPX all closed lower, down -1.15%, -1.25%, -1.24%, and -1.12% , respectively.  All markets rallied throughout the day from their lows, only pausing for the Federal Reserve’s rate decision and statement (which was generally viewed as positive), before continuing their rally, peaking just before the close. The FOMC statement acknowledged the recent uptick in energy prices, but expected inflationary effects to be “transitory”, boosting confidence in the US economy.  Trading desks reported some early selling pressure, largely from vanilla accounts trimming positions.  They reported no heavy selling and in fact, some hedge fund buying, which  they attributed to short covering.  Market volatility broke through recent resistance. In early trading, the VIX broke through 22, peaked at 25.72 (a level last seen this past August), before ending at 24.32, up +15.1% on the day.
Technical indicators are negative.  June SPX futures traded as low as 1251.20 at 5:30 am EDT, but held this technically important level, recovering throughout the day to finish at 1275.30, off     -1.18%.  All the major indexes closed below their 20- and 50-day moving averages.  Intraday, the NYSE and Nasdaq both traded below their 100-day.  All the major averages finished above their 200-week and 100- and 200-day moving averages. The Bloomberg NYSE net new highs was +8 versus Monday’s +7.  The relative strength indicator closed at 38.50, down from Monday’s 43.27, and at the bottom of the neutral range.
Market segments were all negative. Basic materials, oil and gas, and consumer services were down the least. Utilities, technology, and financial services were down the most, off at least -1.2%.
Financials were down across the board, with insurers leading the way.  AFL lead all decliners, off -5.58%, due to its exposure in Japan.  CBG and HIG were among the leaders, down at least  -4.5%.  The banks were off substantially early, with the XLF, BKX and KRX off ~2.5%.  They managed to rally towards the end of the day with XLF, BKX and KRX finishing off -1.16%, -0.88%, and -0.53%, respectively.  All are below their 20- and 50- day moving averages and traded within sight of their 100-day moving average.  Among regional banks, COF and WFC were among the best performers, finishing up +3.32% and +0.53%.  While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with BKX closing -10.9% below its April 2010 high and -37.4% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume rose +33.6 to 1.288 billion shares, from 963.83 million shares Monday, 1.22x the 50-day moving average.  For the 4th day in the past 7 sessions, market breadth was negative, and up volume trailed down volume by a large margin.  Advancing stocks lagged decliners by -1742 (compared to -1104 Monday), or 0.27:1.  Up volume lagged down volume by 0.22:1.
Valuation.  The SPX trades at 13.2x estimated 2011 earnings ($96.81) and 11.7x 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 +4.7%, and +5.4%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +14.2% and +29.5%, respectively.
Large-cap banks trade at a median 1.52x tangible book value and 12.9x 2011 consensus earnings, compared to 1.54x tangible book value and 13.0x 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 higher volume, the SPX fell -14.52 points, or -1.12%, to 1281.87.  Volume rose +35.8% to 1.019 billion shares, up from 750.68 million shares Monday and above the 823.91 million share 50-day moving average.  For the 101st consecutive day, its 50-day moving average closed above its 200-day moving average (1303.00 versus 1181.19, respectively).  The SPX closed above its 200-week moving average (1176.43). 
The SPX gapped lower at the open, crossing through 1268-third resistance immediately.  At 9:36, the index set its intra-day low of 1261.12, a -2.7% intra-day decline.  Finding valuations too compelling, buyers reversed momentum.  At 9:50, the index reached 1270.  By 10:00, gains had consolidated back to 1265, and stocks continued their rally at 10:20.  By 12:30, the SPX reached 1280, 20 points above its opening low.  Buyers took a breather through the early afternoon until the 2:15 Federal Reserve monetary policy statement further fueled positive sentiment.  By 3:20, the SPX reached 1285 and set its intra-day high of 1288.13 at 3.45.   The index lost six points into the closing bell. 
Technical indicators are negative.  The index closed below 1300 for the third time in four sessions.  The index closed above its April 2010 highs for the 71st straight session.  The SPX closed below its 20-day moving average (1316.02) for the sixth straight session.  The index closed -1.62% below its 50-day moving average, closing below that average for the third time in four sessions.  The SPX closed +8.52% above its 200-day moving average.  The 20-day average decreased.  The directional momentum indicator is negative, and the trend is increasing.  Relative strength fell to 39.90 from 44.48, moving into the lower end of a neutral range.  Next resistance is at 1293.18; next support is at 1265.84.
BKX.  On higher volume, the KBW bank index closed at 51.66, down -0.46 points, or -0.88%.  Volume rose +64.0% to 159.50 million shares, up from 97.23 million shares Monday and above the 140.38 million share 50-day average.  The index closed +20.20% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -10.85% below its April 23, 2010 closing high. 
Financials underperformed the market, and large-cap banks underperformed regionals.  At the open, the BKX gapped lower through 51.00 to an intra-day low of 50.84 at 9:35, a -2.5% intra-day decline.  Trading mirrored the broader market.  An immediate bounce from the low retook the 51.00 level and the index quickly reached 51.20.  At 10:00, the index retraced to 51.00 before a 10:20 rally lifted the sector straight to 51.30 by 10:30.  At noon, the BKX broke above 51.40 and reached 51.50 by 12:30.  By 1:00, gains had retraced to 51.30 before the 2:15 Fed policy statement announcement lifted stocks across the board.  At 2:30, the index crossed 51.60 and reached 51.93 by 3:20, setting the index’s intra-day high.  Like the broader market, the BKX lost ground into the close, but financials still finished over +1.6% above its intra-day low. 
Technical indicators are negative.  The index closed above 50 for the 59th straight day.  The BKX closed above its 100- and 200-day moving averages (50.83, and 49.05, respectively), closing above the 200-day average for the 66th straight session.  The index closed below its 20- and 50-day moving averages (53.18 and 53.57, respectively) closing below them for the 15th and 11th straight days, respectively.  The 20- and 50-day moving averages fell and the 20-day closed (by -0.39 points) below the 50-day for the third straight day.  The 50-day moving average closed (by +4.52 points) above the 200-day moving average for the 42nd straight session, but the divergence contracted.  The 100-day moving average closed (by +1.78 points) above the 200-day moving average for the 25th straight session, with the positive divergence still expanding.  The directional movement indicator is negative, and the trend is increasing.  Relative strength fell to 40.80 from 43.26, a neutral range.  Next resistance is 52.23; next support at 50.96.

Disclosure: I am long BBT, WFC, JPM, PNC, USB, STT.