This morning. SPX equity futures are extending the prior two trading days’ gains, up another +1.16% this morning and above first resistance. U.S. equity markets remain in correction. Japanese markets are closed for holiday, but other Asian markets closed higher. News regarding Japan’s Fukushima Daiichi nuclear complex is mixed, with partial power restored but continued radiation releases. A widespread release of nuclear contamination implies the near-permanent loss of productive assets in Japan’s northeast, and a corresponding reduction in Japan’s potential GDP. In Bahrain, the government’s crackdown on mostly Shi’ite protestors restore a semblance of quiet in recent days. European equities are strong on merger news, views that the Japanese crisis is easing, and military actions taken this past weekend against Libya. The principal merger news is that AT&T will purchase Deutche Telecom’s T-Mobile unit for $39 billion. Commodity prices are higher. After a fair value adjustment of +0.1 points, June SPX equity futures are at 1289.00, up +14.79 points after fair value adjustment. The SPX opens at 1279.20, -4.75% below its February 18th post-Lehman high and -1.81% below its 50-day moving average. Next SPX resistance is at 1286.66. Next support is at 1273.96.
Friday was a quadruple witching options expiration and consequently dependably volatile on increased volume. U.S. equity markets closed about +0.50% higher, but gave up about half its best gains, which intraday were in the day’s first half-hour. Financials led all other market segments, spurred by the Federal Reserve’s more liberal than expected approval of capital plans, which allowed some companies to raise payout ratios to 30% of earnings. Most importantly, the Fed’s action signals that the banks have largely recovered, that they are again “safe and sound” even a these higher levels of dividend payout and capital management. Market breadth was positive. For a 2nd consecutive day, market volatility fell markedly, but it remains elevated. The U.S. dollar weakened, and Treasury yields fell. Despite the better result, there was no indication in the day’s action of any change to our assessment that U.S. equity markets are in correction. Market corrections typically end on an intraday reversal on increased volume, when confirmed in subsequent trading.
Today, in Asia, Chinese equity markets closed higher, with better strength in Hong Kong than Shanghai. The Hang Seng and Shanghai composite closed up +1.73% and +0.08%, respectively, with particular strength in energy shares. As on Friday, the SHCOMP gapped higher, but couldn’t hold its gains, traded lower through the afternoon, and closed with a bare gain. Volume fell -3.90%. It’s recent uptrend failed, and the index is currently in correction. In Europe, equity indexes gapped higher, but have held their early gains through mid-session. The Eurostoxx50, FTSE, and DAX are up +1.89%, +1.70%, and +2.04%, respectively. On the EuroStoxx, telecommunications leads with a gain of +4.40%, followed by financials +1.80%.
LIBOR trends are remarkable for their steadiness. Overnight USD LIBOR is lower at 0.20450%, down from 0.20550% Friday, and compared to 0.25188% 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 weaker against euro, but stronger against the yen 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$1.4169, compared to US$1.4182 Friday and US$1.4021 the prior day. The euro trades above its 50-, 100-, and 200-day moving averages. The dollar trades at ¥81.23, compared to ¥80.58 Friday, and ¥78.889 the prior day. Treasury yields are higher, with 2- and 10-year maturities yielding 0.617% and 3.306%, respectively, compared to 0.584% and 3.268% Friday. The yield curve spread widened to +2.689%, compared to +2.684% 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, aluminum, but lower copper, and higher agricultural prices.
U.S. news and economic reporting. Economic reporting picks up with the release of the Chicago Fed National Activity Index at 8:30, followed by February existing home sales at 10:00.
Overseas news. On Saturday, western countries launched attacks on Libya to enforce the U.N.-approved no-fly zone. This weekend’s Egyptian constitutional amendment elections saw large turnout. Bahrain’s main opposition group eased terms to initiate a dialogue with the ruling regime. For the last three days, Syrians protested to end the 48-year old emergency law. This weekend in Japan, power was restored to two of the Dai-ichi nuclear plants’ reactors.
· KEY – prices $625 million common equity offering at $8.85
· KEY – upgraded to buy at Sandler O’Neill, price target of $10.50
· STI – prices $1 billion common equity offering at $29.50
· STI – upgraded to buy at Sandler O’Neill, price target of $34
· C – announced a 1 for 10 reverse stock split and reinstates its dividend at $0.01 per share for the second quarter.
4Q2010 Earnings. The latest quarterly earnings results have exceeded EPS and revenue expectations. Of the 479 S&P500 companies that reported earnings to date, 71% (338 of the 479) 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 +36.9% over the prior year. Though challenged in the current operating environment, 369 companies (77%) reported increased revenues and 314 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. On options expiration, volume was heavy. All of the major indices rose for a 2nd consecutive day. The major indexes opened near their intraday highs, but gradually lost ground throughout the session to end with less than half the morning’s gain and near their lows for the day. The DJI, SPX, NYSE, and Nasdaq finished the day up +0.71%, +0.43%, +0.64%, and +0.29%, respectively. The gains were helped by positive news from the Middle East and the Federal Reserve, which completed its latest “stress test” of 19 large U.S. banks and approved all 19 capital plans, which generally included some increase in dividends and capital management. All week, investors had struggled with macro issues, and markets benefited from the Fed’s signal that the large U.S. banks were again “safe and sound”. Trading desks reported increased activity primarily by faster accounts, but also with long vanilla accounts adding to positions. Sellers, who have been disappointed in recent weeks that markets haven’t sold off more, were present, but a lack of shorts was duly noted. The VIX ended the day off -7.32%, at 24.44.
Last week was challenging due to a lack of corporate news, mixed economic reports, and tragic macro news. Investors focused first on news from Japan’s nuclear power plant, then on the Middle East. Overall, equities pulled back for a second consecutive week with the SPX finishing down ~2.00%. A month ago, stocks were at their recent peak and the AAII bullish sentiment was at 51.54 (February 3rd). This week the AAII bullish sentiment was just 28.49 (March 17th). On February 4th, the Investment Company Institute reported net inflows for domestic equity mutual funds of $7.89 billion. Economically, we saw positive reports on the CPI, initial and continuing jobless claims, and the Philadelphia Fed manufacturing survey. On the negative side, housing starts were lower, mortgage applications were down, and the Producer Price Index was slightly higher.
Technical indicators were generally weak on Friday. The SPX finished the day at 1279.20, below its 20-and 50-day moving average, but above key support at 1250, which we tested earlier in the week. The SPX, DJI, NYSE, and Nasdaq were below their 20- and 50-day moving average, but above their 200-week and 100-day moving average. Relative strength index was 43.70, up from Thursday’s 40.81 and in the low end of a neutral range. The Bloomberg NYSE new net highs were +2.00 versus the previous day’s -52.
Market segments were mostly positive with only the oil & gas sector lower. Financials, telecommunications, and industrials led the way up. Other weak segments, though positive, included technology, basic materials, and consumer services.
Financials had an outstanding day on the Fed’s actions and company announcements of dividend and capital management. STI, GS, and JPM lead all gainers in the financial sector, up +4.74%, +2.70% and +2.65%. Though the news had been expected by most investors, it was good to finally see the announcement in detail and the resulting dividend announcements. Probably not as expected were the smaller capital raises announced by STI and KEY needed in order to repay TARP. This seemed to indicate that those names were in better capital positions then the Street was anticipating and helped other current TARP names to higher levels as well. The BKX , XLF and KRX all closed higher, up +1.05%, +1.12%, and +1.35%. The BKX, KRX and XLF closed below their 20- and 50-day average, but above their 100-day and 200-week average. While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -10.11% below its April 2010 high and -36.89% below its best level of 82.55 in September 2008.
NYSE Indicators. On options expiration, volume rose +83.9% to 1.907 billion shares, from 1.037 billion shares Thursday, 1.77x the 50-day moving average. For the 2nd consecutive day, market breadth was positive, and up volume exceeded down volume. Advancing stocks led decliners by +1315 (compared to 1401 Thursday), or 2.57:1. Up volume led down volume by 2.40:1.
Valuation. The SPX trades at 13.2x estimated 2011 earnings ($96.99) and 11.6x estimated 2012 earnings ($110.10), compared to 13.1x and 11.6x 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 +4.9%, and +5.8%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +14.4% and +29.9%, respectively.
Large-cap banks trade at a median 1.53x tangible book value and 13.0x 2011 consensus earnings, compared to 1.51x tangible book value and 12.9x 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 and 2012 BKX earnings to exceed 2010 operating earnings by +27.5% and 71.6%, respectively.
SPX. On higher, option and futures expiration-inspired volume, the SPX rose +5.48 points, or +0.43%, to 1279.20. Volume rose +76.2% to 1.481 billion shares, up from 841.04 million shares Thursday and above the 844.32 million share 50-day moving average. For the 104th consecutive day, its 50-day moving average closed above its 200-day moving average (1302.83 versus 1183.88, respectively). The SPX closed above its 200-week moving average (1176.43).
The SPX gapped higher at the open, breaching 1288 in trading’s first 10 minutes and setting an intra-day high of 1288.88 at 9:42. Coordinated Yen-weakening intervention and the U.N.’s Libyan no-fly zone agreement fueled positive sentiment. By 10:30, the index retraced some gains and fell to 1282. The Federal Reserve’s 11:00 announcement of the bank capital assessment results fueled a second rally to the 1288 level, but the rally was sold back to 1282. The index traded sideways through 2:30 when profit taking dropped the SPX below 1280. Buyers could not reverse sellers’ momentum, and by 3:15, the index sank to an intra-day low of 1276.18. Stocks managed a small rally into the close, but did not retake 1280.
Technical indicators are mixed. The index closed below 1300 for the sixth time in seven sessions. The index closed above its April 2010 highs for the 74th straight session. The SPX closed below its 20-day moving average (1306.27) for the ninth straight session. The index closed -1.81% below its 50-day moving average, closing below that average for the sixth time in seven sessions. The index closed +1.02% above its 100-day moving average for the second straight session. The SPX closed +8.05% above its 200-day moving average. The 20-day average declined. The directional momentum indicator is negative, and the trend is increasing. Relative strength rose to 42.53 from 40.43, a neutral range. Next resistance is at 1286.66; next support is at 1273.96.
BKX. On higher volume, the KBW bank index closed at 52.09, up +0.54 points, or +1.05%. Volume rose 98.1% to 240.86 million shares, up from 121.56 million shares Thursday and above the 141.03 million share 50-day average. The index closed +21.20% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -10.11% below its April 23rd closing high.
Financials were the market’s best performing sector, and regionals outperformed large-cap banks. The BKX gapped higher at the open, through 52.00 and above 52.20. By 9:45, the BKX reached 52.50 before profit-taking return the index to 52.10 at 10:30. The Federal Reserve’s 11:00 announcement of bank capital assessments lifted the market above 51.60. The index responded to individual bank dividend increases, fluctuating with each name’s news. At 11:30, the index sank back to 52.10 before rallying again to an intra-day high of 52.65 at 12:40. The index traded above 52.40 through the afternoon, but profit taking weighed on momentum after 2:00. The index fell through the late afternoon and breached 52.00 at 3:50. The BKX rallied at the bell to close above this threshold.
Technical indicators are mixed. The index closed above 50 for the 62nd straight day. The BKX closed above its 200-day moving average (49.08) for the 69th straight session and above its 100-day moving average of 51.00. The index closed below its 20- and 50-day moving averages (52.61 and 53.44, respectively), closing below these averages for the 18th and 14th straight days, respectively. The 20- and 50-day moving averages fell. The 20-day closed (by -0.84 points) below the 50-day for the sixth straight day, with the negative divergence expanding. The 50-day moving average closed (by +4.36 points) above the 200-day moving average for the 45th straight session, with the positive divergence contracting. The 100-day moving average closed (by +1.92 points) above the 200-day moving average for the 28th straight session, with the positive divergence expanding. The directional movement indicator is negative, and the trend is stable. Relative strength rose to 45.84 from 42.14, a neutral range. Next resistance is 52.64; next support at 51.57.
Disclosure: I am long C, GS, JPM.