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U.S. Equity Futures Edge Higher After Friday's Gains

|Includes: BBT, Citigroup Inc. (C), CIT, COF, GE, GS, MTB, NDAQ, PNC, STI, TCF
This morning.  U.S. equity futures are moderately higher.  Overseas equity markets are generally higher.  U.S. equity markets are in a confirmed uptrend.  The U.S. dollar and commodity prices are mixed.  After a fair value adjustment of +0.11 points, the June SPX equity futures are at 1330.20, up +2.39 points.  The SPX opens at 1332.41, -0.79% below its February 18th post-Lehman high and +1.77% above its 50-day moving average. Next resistance is at 1337.21.  Next support is at 1328.25.
 
Friday, U.S. equity markets opened at their intraday lows, traded to intraday highs mid afternoon, when selling pressure moved markets lower before rallying into the close with moderate gains. Volumes declined to below 50-day moving averages.  Financials were among the better performing market segments.  Market breath was positive, and up volume led down volume.  Market volatility declined to its lowest levels since February 18th, the markets’ high point prior to the recent correction.
 
Today, Asian markets closed higher, with particular strength in China.  The Nikkei closed +0.11% higher, on lower volume.  The Hang Seng and Shanghai composite rose +1.46% and +1.34%, respectively, both on lower volume.  The Eurostoxx50, FTSE, and DAX are modestly higher, up +0.03%, +0.24%, and +0.07%, respectively.  On the EuroStoxx, financials are middling performers, unchanged on the day.
 
Libor continues to trend lower, despite sovereign debt and inflation concerns.  Levels are now comparable to those seen prior to last year’s sovereign debt crisis. Overnight USD LIBOR is lower at 0.17820%, down from 0.18400% Friday and compared to 0.25188% at year-end.  USD 3- month LIBOR is lower at 0.29675%, compared to 0.30100% the prior day and 0.30950% at year-end.  In early trading, the dollar is slightly stronger against the euro and pound, and weaker compared to the 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$1.4220, compared to US$1.4237 Friday and US$1.4158 the prior day.  The Euro trades above its 50-, 100-, and 200-day moving averages.  The dollar trades at ¥83.99, compared to ¥84.06 Friday and ¥83.13 the prior day.  Treasury yields are slightly lower, with 2- and 10-year maturities yielding 0.774% and 3.440%, respectively, compared to 0.798% and 3.442% Friday. The yield curve widened to +2.666% from +2.644% from 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 mostly higher, with higher petroleum but lower natural gas, higher precious metals, lower copper and aluminum, and mostly higher agricultural prices.
 
U.S. news and economic reporting.  Today’s economic reporting is light, picking up tomorrow with March ISM manufacturing, followed Wednesday by the minutes of the latest FOMC meeting and MBA mortgage applications.
 
Overseas news.   In March, China’s non-manufacturing purchaser managers’ index rose to 60.2 from 44.1 in February.  Envoys representing Libyan leader Gaddafi expressed a willingness to end fighting.  Yesterday, Bahrain’s government suspended the leading opposition newspaper, accusing it of “lies.” 
 
Company news/research:
 
·         C, PNC, BBT – named top 1Q2011 picks at Deutsche Bank
·         MTB – initiated at equal weight at Morgan Stanley
·         STI – upgraded two notches to neutral from sell at Janney Montgomery, price target raised to $27 from $23
·         GS – cuts 2011 GDP forecast to 2.5% from 3.5%
·         TCB – debit interchange lawsuit against the Federal Reserve begins in court today
·         NDAQ – downgraded to hold at Jefferies
·         COF, GE, and CIT – mentioned as possible bidders for ING’s U.S. online banking operation
 
4Q2010 Earnings.  The latest quarterly earnings results have exceeded EPS and revenue expectations.  Of the 497 S&P500 companies that reported earnings to date, 71% (357 of the 497) beat operating EPS estimates, versus the historical average of 62%.  Companies beat by an average of +5.5% (versus a historical average of +2%).  EPS is up +36.3% over the prior year.  Though challenged in the current operating environment, 386 companies (78%) reported increased revenues and 327 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 lighter volume, all major indices closed higher. The DJI, NYSE composite, SPX, and Nasdaq finished up +0.46%, +0.77%, +0.50, and +0.31%.  As in recent days, the major averages saw their lows at the open, their highs at midday, and finished at a midpoint.  Beginning at 2:30, all indexes made a sharp move down beginning and then rallied after 3:20 into the close. One trader explained that the dip was caused by indexers who needed to raise cash to add BLK, a $202 stock, to their portfolios.  BLK replaced GENZ in the SPX after the close.  Economic news was mostly positive after the U.S. unemployment rate unexpectedly dropped to a two-year low of 8.8%.  In March, U.S. manufacturing expanded to its fastest pace in almost seven years. The VIX closed at 17.40, off -1.92% on the day and at its lowest reading since February 18th, the start of the most recent correction.
 
Technical indicators remain generally positive. The SPX tested support with a low print of 1328.89 and also saw resistance with a high print of 1337.85.  Next support is 1328.25 and the next resistance is 1337.21.  All the major average closed above their 200-week, and 50-, 100-, and 200-day moving averages.  The Bloomberg NYSE new net highs were +221 versus Thursday’s +256, and well above its 50-, 100-, and 200-day moving averages.  The relative strength index finished at 61.10, higher than Thursday’s 57.90, and moving into the higher end a neutral range.
 
Market segments were mixed. Industrials, financials, and consumer services led the gainers, up +0.88%, +0.80%, and +0.73%, respectively. Technology and telecommunications were the only losing sectors, off -0.14% and -0.12%.
 
Financials were positive, the 2nd strongest market segment. The BKX , XLF and KRX all finished higher, up +0.98%, +0.85%, and +1.11%, respectively. The largest gainers on Friday were the NYX and NDAQ, after the latter along with ICE made an unsolicited bid for the NYX valued at $11.3 billion.  The NYX finished up +12.6% and the NDAQ closed up +9.25%.  Smaller regional banks outperformed for a second day in row led by SNV, NPBC, and CVBF, each up at least +3.30%.  Among larger cap banks, HBAN, ZION, and FNFG led the way, each up over +1.90%.  The BKX and XLF finished below their 50-day moving averages, but above their 200-week, 100-, and 200-day averages. The KRX finished above its 200-week, 50-, 100-, and 200-day average.  While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -9.53% below its April high and -36.48% below its best level of 82.55 in September 2008.
 
NYSE Indicators.  Volume fell -16.2% to 902.12 million shares, from 1.076 billion shares Thursday, and 0.87x the 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +1163 (compared to +515 Thursday), or 2.25:1.  Up volume led down volume by 2.85:1.
 
Valuation.  The SPX trades at 13.7x estimated 2011 earnings ($96.97) and 12.1x estimated 2012 earnings ($109.97), compared to 13.7x and 12.1x 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 +4.8%, and +5.6%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +14.4% and +29.7%, respectively.
 
Large-cap banks trade at a median 1.60x tangible book value and 13.1x 2011 consensus earnings, compared to 1.58x 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 +28.3% and 72.0%, respectively. 
 
SPX.  On lower volume, the SPX rose +6.58 points, or +0.50%, to 1332.41.  Volume fell -10.19% to 735.72 million shares, down from 819.23 million shares Thursday and below the 816.36 million share 50-day moving average.  For the 113th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1309.22 versus 1195.29, respectively).  The SPX closed above its 200-week moving average (1174.39). 
 
The SPX gapped higher at the open, immediately crossing 1328-level resistance and 1330.  By 9:45, the index reached 1334.  A small sell-off retraced gains but enticed buyers.  By 9:50, the index began another rally, rising from 1331 to 1336 by 10:30 and then the intra-day high of 1337.85 at 11:30.  Through the early afternoon, equities traded mostly sideways.  At 2:40, a sharp sell-off sent the SPX from 1336 to its intra-day low of 1328.89 at 3:15.  Trading desks reported index changes at the day’s end prompted position re-allocations and inspired the sell-off. By 3:30, the SPX retook 1330 and broke through 1332 just prior to the closing bell, where it finished. 
 
Technical indicators are positive.  The index closed above 1300 for the seventh straight session.  The index closed above its April 2010 highs for the 84th straight session.  The SPX closed above its 20-day moving average (1303.44) for the seventh straight session.  The index closed +1.77% above its 50-day moving average, closing above that average for the seventh straight session.  The index closed (by +4.64%) above its 100-day moving average for the 11th straight session.  The SPX closed +11.47% above its 200-day moving average.  All moving averages increased.  The directional momentum indicator is positive for the third consecutive day, and the trend is stable.  Relative strength rose to 60.23 from 58.04, a neutral range.  Next resistance is at 1337.21; next support is at 1328.25. 
 
BKX.  On lower volume, the KBW bank index rose +0.51 points, or +0.98%, to 52.43.  Volume fell -24.32% to 84.49 million shares, down from 111.64 million shares Thursday and below the 124.61 million share 50-day average.  The index closed +21.99% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -9.53% and -5.14% below its April 23,  2010 and February 15, 2011 closing highs, respectively. 
 
Financials outperformed the market, and regionals outperformed large-cap banks.  The BKX gapped +1.0% higher at the open, immediately crossing 52.12-level resistance and reaching 52.40.  A 9:50 rally took the index from 52.30 through 52.60 by 10:15 and to the intra-day high of 52.75 by 11:35, a +1.6% gain.  Financials retraced by a larger amount than broader markets in the early afternoon.  By 1:30, the BKX traded back down to 52.50 before the 2:40 sell-off took financials to their intra-day low of 52.25 by 3:20.  The BKX rallied into the close, and finished back above 52.40, its opening level. 
 
Technical indicators are trending positive.  The index closed above 50 for the 72nd straight day.  The BKX closed above its 20-, 100-, and 200-day moving averages (51.98, 51.53 and 49.24) for the first, 12th, and 79th straight sessions, respectively.  The index closed below the 50-day moving average (53.13), closing below that average 24th straight session.  The 50-day moving averages fell.  The 20-day closed (by -1.15 points) below the 50-day for the 14th straight day, but the negative divergence contracted.  The 50-day moving average closed (by +3.90 points) above the 200-day moving average for the 55th straight session, with the positive divergence contracting.  The 100-day moving average closed (by +2.30 points) above the 200-day moving average for the 38th straight session, with the positive divergence expanding.  The directional movement indicator switched to positive for the first time since February 21st, and the trend is declining.  Relative strength rose to 51.27 from 46.71, a neutral range.  Next resistance is 52.80; next support at 52.01.
 


Disclosure: I am long C, PNC, BBT, STI, GS.