Equity Markets Rebound on Strong Global Earnings
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Long/Short Equity, Short-Term Horizon, Medium-Term Horizon
Seeking Alpha Analyst 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. Strong earnings reports overnight and strong equity markets abroad have pushed U.S. equity futures higher. Volatility is down, and U.S. Treasury prices are higher. The U.S. dollar is weaker. After a fair value adjustment of -0.03, June SPX equity futures are at 1326.70, up +18.10 points. The SPX opens at 1312.62, -2.26% below its February 18th post-Lehman high and -0.19% below its 50-day moving average. Next resistance is at 1315.56. Next support is at 1306.83.
The market uptrend is under pressure. Recovering from Monday’s S&P-triggered sell-off, equity markets gapped modestly higher, lost ground mid-day, and rallied through the afternoon, principally on another strong earnings season. Volumes were lower, well below the 50-day moving average. The number of distribution days was unchanged at 3 on the NYSE, 2 on the DJI, and 1 on the Nasdaq and SPX. Distribution days, which indicate institutional selling, pressure uptrends and push markets back into correction. Market breadth was negative, and up volume lagged down volume by a large margin. Volatility declined through the day. Financials were middling performers.
Today, Asian equity markets closed higher, with strong gains attributed to improved U.S. housing results and 1Q2011 earnings. The Nikkei closed up +1.76%. Financials rose, +1.26%, but lagged most of the market. In China, the Hang Seng and Shanghai composite closed up +1.60% and +0.27%, respectively. On the SHCOMP, volume fell -15.5% to 11.96 billion shares. The index gapped higher, retreated lower in early afternoon, but rallied in the final two hours to end at 3007.04. Financials were the worst performing market segment, down -0.13%. Chinese equity markets are in a confirmed uptrend, recovering most of their losses after the past November-January correction. The index is up +12.3% since it correction-low close on January 25th. In Europe, the Eurostoxx50, FTSE, and DAX are higher, +2.22%, +2.17%, and +2.75%, respectively. Gains are attributed to strong earnings reports from Peugeot and L’Oreal. Financials are the 3rd worst performing market segment, but are up +1.68% on the day.
Libor continues to trend lower, despite sovereign debt and inflation concerns. Levels are now below those seen prior to last year’s sovereign debt crisis. Overnight USD LIBOR is unchanged at 0.13350% and compared to 0.25188% at year-end. USD 3- month LIBOR is unchanged at 0.27375% and compares to 0.30950% at year-end. A recent rule change regarding bank deposit rates at the Fed, may have pushed some of U.S. deposits offshore. In early trading, the dollar is slightly weaker 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$1.4527, compared to US$1.4335 Tuesday and US$1.4235 the prior day. The Euro trades well above its 50-, 100-, and 200-day moving averages. The dollar trades at ¥82.71, compared to ¥82.59 Tuesday and ¥82.66 the prior day. The yen trades below its 200-day moving average ¥82.60. U.S. Treasury yields are slightly higher, with 2- and 10-year maturities yielding 0.677% and 3.402%, respectively, compared to 0.645% and 3.363% Tuesday. The yield curve widened to +2.725%, from +2.718% 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 and copper, and agricultural prices.
U.S. news and economic reporting. Bank earnings reports continue with WFC and HBAN.
Overseas news. Today, Spain auctioned €3.4 billion of 10- and 13-year bonds, the top end of the expected size in heavier demand than prior auctions. In March, Germany’s producer price index rose less than expected. Today, central banks in South Korea, Thailand, and Malaysia intervened in currency markets to slow a surge in their currencies’ appreciation.
· HBAN - reports 1Q11 GAAP and operating EPS of $0.14 and $0.15 respectively, beating estimates of $0.12
· WFC - reports 1Q11 GAAP and operating EPS of $0.67 and $0.75 respectively, compared to estimates of $0.67
1Q2011 Earnings. The first quarter’s earnings results have so far exceeded EPS and revenue expectations. Of the 46 S&P500 companies that reported earnings to date, 78% (36 of the 46) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies have beat by an average of +10.5% (versus a historical average of +2%). EPS is up +11.9% over the prior year. Though challenged in the current operating environment, 33 companies (72%) reported increased revenues and 34 companies (74%) beat revenue estimates. In the first quarter of 2011, analysts estimate the SPX will earn $24.32 per share, compared to $22.47 and $19.49 per share in 4Q10 and 1Q10, a +8.2% and +24.8% increase, respectively.
Out of the 15 BKX members to have reported earnings thus far, 74% (11 of 15) have beat earnings estimates on an operating basis. Revenues have so far disappointed, with 57% of BKX members missing estimates. In the first quarter of 2011, analysts estimate the BKX will earn $0.93 per share, in-line with 4Q10 earnings and 175% above 1Q10 earnings of $0.34 per share.
Valuation. The SPX trades at 13.5x estimated 2011 earnings ($97.59) and 11.8x estimated 2012 earnings ($110.87), 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 2011, analysts increased 2011 and 2012 earnings estimates by +3.1%, and +3.3%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +15.1% and +30.8%, respectively.
Large-cap banks trade at a median 1.51x tangible book value and 12.3x 2011 consensus earnings, compared to 1.51x tangible book value and 12.2x 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 +28.5% and 72.0%, respectively.
Tuesday’s equity markets. On lower volume, the major markets closed higher, ending two days’ decline. The NYSE, SPX, DJI, and Nasdaq finished the day higher, up +0.66%, +0.57%, +0.53%, and +0.35%, respectively. Markets showed resilience, as investors bought shares in a light tape to recover some of Monday’s losses. Markets opened higher, retreated lower at midday, and then advanced through the afternoon to close near their highs. News flows were generally positive throughout the day. Earnings continued to be generally strong with beats by JNJ, GS, and BTU. Economic news released Tuesday showed building permits increased +11.2% versus estimates of +1.1% growth. Housing starts also increased in March, up +7.20% though not as much as forecast. Trading desks continue to report light participation during this Passover and holiday shortened week. The VIX closed at 15.83, off -6.66%.
Technical indicators are mostly negative. The major averages traded in relatively tight ranges today. Only the Nasdaq touched a resistance level of 2746 on its high print early in the morning. The NYSE, Nasdaq, and SPX finished below their 20-, and 50-day moving averages, but above their 100-, 200-day and 200-week average. The DJI closed beneath its 20-day average, but above the other key averages. The Bloomberg NYSE new net highs were -7 versus Monday’s +81. This is the first negative reading we have seen since March 15th. The relative strength index finished higher at 47.94 versus Monday’s 43.26, and near the middle of a neutral range.
Market segments were mixed. Basic materials, oil and gas, and health care led the gainers up +1.69%, +1.12%, and +0.95%, respectively. Laggards were telecommunications, utilities, and consumer goods.
· Financials were mixed. The XLF and BKX finished the day up (+0.31%, +0.06%), while the KRX was lower, off -0.87%. Within financials, regional banks were the leaders. ZION (+3.88%) reported a strong quarter (+$0.08 per share versus estimates of -$0.15) and a return to profitability ahead of estimates. Other leaders were RF (+2.72%), C (+2.49%), and WFC (+1.86%). The smaller regional bank space had a tougher day, with CATY, NPBC, and HCBK, up more than +0.31%. Only 5 other names gained in the KRX out of 50 names. The laggards in the KRX were PNFP, WL, and SNV, off at least -2.6%. The BKX, KRX, and XLF all finished below their 50-, and 100-day moving average, but above their 200-day and 200-week averages. While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -12.9% below its April 2010 high and -38.8% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume fell -19.8% to 836.38 million shares, from 1.042 billion shares Monday, 0.83x the 50-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +1026 (compared to -1882 Monday), or 2.03:1. Up volume lagged down volume by 2.35:1.
SPX. On lower volume, the SPX rose +7.48 points, or +0.57%, to 1312.62. Volume fell -17.4% to 679.43 million shares, down from 822.45 million shares Monday and below the 785.79 million share 50-day moving average. For the 125th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1315.12 vs. 1210.66, respectively). The SPX closed above its 200-week moving average (1171.48).
The SPX gapped higher at the open, but momentum flagged. Two rallies, at 9:40 and 10:30, failed to break through the 1310-level. The index retraced gains back to break-even by 11:00, and turned negative at 11:15. The SPX set its intra-day low of 1303.97 at 11:30. A healthy rally took hold and lasted through the closing bell. The index rose consistently through 1:45, when it crossed 1310 to the upside. Trading in a narrow range between 1310 and 1312 through 3:30, the index broke higher into the bell and set the intra-day high of 1312.70 at 3:52. The index closed just below the high.
Technical indicators are mixed. While moving day averages are configured bullishly, the SPX has not achieved new highs nor broken through important resistance levels, indicating weakness. The lack of positive momentum has caused short term moving averages to begin falling. The index closed above 1300 for the 19th straight session. The index closed above its April 2010 highs for the 95th straight session. The SPX closed (by -0.58%) below its 20-day moving average (1320.24) for the second straight session. The index closed (by -0.19%) below its 50-day moving average for the second straight session. The index closed (by +1.89%) above its 100-day moving average for the 23rd straight session. The SPX closed +8.42% above its 200-day moving average. The 50-day moving average declined. The directional momentum indicator is negative for the seventh consecutive session, and the trend is increasing. Relative strength rose to 48.43 from 43.92, a neutral range. Next resistance is at 1315.56; next support is at 1306.83.
BKX. On lower volume, the KBW bank index rose +0.03 points, or +0.06%, to 50.50. Volume fell -24.47% to 155.61 million shares, down from 206.02 million shares Monday but above the 124.51 million share 50-day average. The index closed +17.50% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -12.86% and -9.22% below its April 23, 2010, and February 14, 2011 closing highs, respectively.
Financials underperformed the market for the fifth consecutive day, and regionals’ losses underperformed large-cap banks’ marginal gains. The BKX gapped higher at the open, fueled by earnings strength and potentially short covering. The index set its intra-day high at the opening bell, at 50.88. Momentum turned negative immediately, and financials declined through the morning, turning negative at 11:00 and reaching the intra-day low at 50.24 at 11:30. A rally at 12:20 lifted the index through 1:50 and the index retook its break-even line and reached 50.60 before selling off back to break-even. The index traded sideways through the close, fluctuating between minimal gains and losses, but closed on a small move higher.
Technical indicators are turning negative. The BKX has remained bound on the upside by the 50-day moving average (now at 52.71 and falling). The 20-day moving average has remained below the 50-day moving average since March 11th. The declining 50-day moving average will cross below the increasing 100-day moving average in the next few days. The index closed below the 20-, 50-, and 100-day moving averages (51.89, 52.71, and 52.22) for the fifth, ninth, and fifth consecutive sessions, respectively. The index closed above 50 for the 83rd straight day. The BKX closed above its 200-day moving average (49.49) for the 89th straight session. The 20- and 50-day moving averages fell. The 20-day closed (by -0.82 points) below the 50-day for the 26th straight day, but the negative divergence contracted. The 50-day moving average closed (by +3.22 points) above the 200-day moving average for the 67th straight session, but the positive divergence contracted. The 100-day moving average closed (by +2.72 points) above the 200-day moving average for the 50th straight session, and the positive divergence expanded. The directional movement indicator is negative for the fifth consecutive day, and the trend is increasing. Relative strength rose to 34.22 from 33.82, the low end of a neutral range. Next resistance is 50.84; next support at 50.20.
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