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U.S. Equity Futures Drift Lower, Europe Still on Holiday

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This morning.  U.S. equity markets return from their Good Friday holiday and the resumption of 1Q2011 earnings reports.  Equity markets are in a confirmed uptrend.  Volatility is at its lowest levels in the past year.  This morning, equity futures are modestly lower.  Commodity prices are higher.  U.S. Treasury prices are slightly stronger.  The U.S. dollar is at its weakest since late 2009.  After a fair value adjustment of +2.43 points, June SPX equity futures are at 1332.10, down 3.53 points.  The SPX opens at 1337.38, -0.43% below its February 18th post-Lehman high and +1.66% above its 50-day moving average.  Next resistance is at 1338.97.  Next support is at 1334.31.
U.S. and European equity markets were closed Friday.  Thursday, U.S. equity markets rose moderately on continued strong 1Q2011 earnings reports.  Volume was pre-holiday light.  Equity markets resumed their uptrend.  Markets gapped much higher, held strength throughout the day, and closed near their intraday highs.  After several strong technology company earnings reports, Nasdaq posted the best gain, closing up +2.10%, though still below its February high.  The DJI closed at a new post-Lehman high.  Market breadth was positive, and up volume led down volume by a large margin.  Volatility declined through the day.  Distribution days number 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.
Today, most Asian equity markets closed mixed.  The Nikkei closed down -0.11%.  Japan’s economy is expected to contract in 1Q2011, and may contract also in 2Q2011.  Financials closed up +0.70%.  In China, the Hang Seng is closed.  On energy price and inflation concerns, the Shanghai composite closed down -1.51%, its 2nd consecutive daily loss.  On the SHCOMP, volume declined -0.93% to 11.72 billion shares.  The index traded lower in early trading, rallied through midday, and flagged through the afternoon, ending near the intraday low at 2964.95.   Financials were the 4th best performing market segment, down -0.85%.  Chinese equity markets are in a confirmed uptrend.  The past two day’s losses have been on lower volume, avoiding distribution days.  The index is up +10.77% since it correction-low close on January 25th.  European equity markets are closed for Easter Monday.  The FTSE will be closed Friday for the Royal wedding. 
Despite sovereign debt and other macro-concerns, Libor levels are below those seen prior to last year’s sovereign debt crisis.  Overnight USD LIBOR is 0.13550%, compared to 0.13350% Friday and 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$1.4616, compared to US$1.4561 Friday and US$1.4552 the prior day.  The Euro trades well above its 50-, 100-, and 200-day moving averages.  The dollar trades at ¥81.93, compared to ¥81.88 Friday and ¥81.85 the prior day.  The yen trades above its 200-day moving average ¥82.52, which is trending lower.  U.S. Treasury yields are slightly lower, with 2- and 10-year maturities yielding 0.652% and 3.387%, respectively, compared to 0.660% and 3.396% Thursday.  The yield curve narrowed to +2.735%, from +2.736% 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 tomorrow.  Economic releases focus on the March new home sales and Dallas Fed manufacturing activity, at 10:00 and 10:30, respectively.  The Fed’s FOMC holds a two-day meeting.  Post-meeting, Bernanke initiates press conferences at 12:30 Wednesday.
Overseas news.   Today, Finland’s finance minister, the incoming leader of the new government, announced the country would participate in Portugal’s bailout.  On Friday, Japan’s cabinet approved a $50 billion reconstruction fund to repair damage caused by the earthquake and tsunami.  This weekend, Syria witnessed a large escalation in violence and bloodshed during regime-change protests, with over 100 people reportedly killed on Friday alone.  Today, Yemen’s president agreed to step down and hand over power to a deputy in exchange for prosecutorial immunity.  Today, press reports indicate NATO forces failed to assassinate Libyan leader Gadhafi. 
Company news/research:
·         BBT – cut to perform at Oppenheimer
·         BBT – raised to neutral at Goldman Sachs, price target raised to $26 from $23
·         COF – price target raised to $69 from $65 at Sanford Bernstein
·         FHN – cut to neutral at BofA/ML, price target lowered to $11 from $13
·         STI – upgraded to perform at Oppenheimer
1Q2011 Earnings.    The first quarter’s earnings results have so far exceeded EPS and revenue expectations.  Of the 121 S&P500 companies that reported earnings to date, 80% (97 of the 121) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies have beat by an average of +9.9% (versus a historical average of +2%).  EPS is up +16.2% over the prior year.  Though challenged in the current operating environment, 87 companies (72%) reported increased revenues and 88 companies (73%) 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 23 BKX members to have reported earnings thus far, 74% (17 of 23) have beat earnings estimates.  Revenues have so far disappointed (by -0.77% on average), 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 13.7x estimated 2011 earnings (increased to $97.97 from $97.74) and 12.0x estimated 2012 earnings (increased to $111.13 from $110.87), compared to 13.6x and 12.0x 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 +3.6%, and +3.6%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +15.6% and +31.1%, respectively.
Large-cap banks trade at a median 1.51x tangible book value and 12.4x 2011 consensus earnings, compared to 1.51x tangible book value and 12.0x 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 +29.8% and 71.6%, respectively. 
Thursday’s equity markets. On lighter, pre-holiday volume, equity markets closed moderately higher as earnings continued to surprise to the upside.  The Nasdaq, NYSE, SPX, and DJI all advanced, up +0.63%, +0.55%, +0.53%, and +0.42%, respectively.  Markets opened higher on earnings beats and stretched their gains through the day, only dipping at 10:00 on a disappointing Philadelphia Fed manufacturing index report.  The DJI had the best run, finishing on its high for the day and closing at levels last seen in June 2008.  Despite the Philadelphia Fed report, economic news helped drive markets higher.  On Thursday, the initial jobless claims number, while above estimates, contained 10k fewer applications than the prior week. The index of leading indicators increased for the 9th straight month.  The VIX closed at 14.69, off -2.52%, the lowest levels in a year.
Technical indicators were generally positive. The SPX was range bound, trading in a tight 5 point range, but approaching its resistance point of 1335-1340. The DJI and NYSE also closed in on their next resistance levels (12531 and 8509). The Nasdaq traded through two resistance levels ( 2808, 2814) after opening at 2820 ,then going lower and recovering through the afternoon to close at 2820. The only technical piece missing to confirm this uptrend is volume and that proved difficult during the holiday shortened week. The AAII Investor Sentiment Bullish reading was 32.16, sharply lower than last week’s 42.30. The Bloomberg NYSE new net highs were +166 versus Wednesday’s +32, and back above the 50-, 100-, and 200- day moving average. The relative strength index closed at 59.47, up from Wednesday’s reading of 56.73, and in the higher end of a neutral range.
Once again, all market segments were positive. Basic materials, technology and oil and gas led other sectors, while consumer goods, utilities, and telecommunications were the laggards.
·         Financials rose.  The XLF finished +0.56% higher, while the KRX and BKX both finished up +0.42%.  A large number of financials reporting earnings.  The trend continues as financials beat earning per share estimates, yet were sold off after perceived misses either on revenue, loan originations, or some other revenue factor.  Thursday’s laggards included BBT (-2.29%), STI (-1.92%), and FITB (-1.20%).  The gainers were led by COF (+5.42%), HBAN (+4.05%), and PBCT (+2.8%).  Among the smaller regional banks, the disparity was equally harsh.  Wednesday’s reporters faired the best on Thursday, PACW (+4.19%) and TCBI (+3.69%), while Thursday’s reporters finished poorly, FHN (-3.54%).  The BKX, KRX, and XLF each closed beneath the 20-, 50-, and 100-day moving average, but above the 200-day and 200-week average.  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 -38.9% below its best level of 82.55 in September 2008.
Hill-Townsend Capital.  On the day, HTC gained +$245.2 thousand, outperforming the SPX, BKX, and KRX, but slightly trailing the XLF.  Our common equity positions rose +0.58%.  Our warrant positions rose +0.49%.  Our ETF position rose +0.19%.  Our preferreds rose +0.21%.  Our short positions ended the day unchanged.  In April, we have a market value loss of -$919.7 thousand, or -1.94%, including interest and accrued dividends month-to-date.  We have underperformed the SPX (+0.87%) and XLF (-1.77%), but outperformed the BKX (-2.79%) and KRX (-2.29%).  In 2011, our adjusted NAV is up +$173.7 thousand, or +0.38%.  We are underperforming the SPX (+6.34%) and XLF (+0.94%), but are outperforming the BKX and KRX (-3.33% and -1.34%, respectively).
Our NAV ended at $46.197 million, compared to $45.961 million the prior day and $47.484 million at the end of March.  Our cash position is -$3.578 million, -7.74% f NAV, compared to -$3.544 million, -7.71% of NAV the prior day.
NYSE Indicators.  Volume fell -15.4% to 812.78 million shares, from 961.24 million shares Wednesday, 0.81x the 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +952 (compared to +1985 Wednesday), or 1.93:1.  Up volume led down volume by 1.79:1.
SPX.  On lower volume, the SPX rose +7.02 points, or +0.53%, to 1337.38.  Volume fell -13.9% to 697.88 million shares, down from 807.56 million shares Wednesday and below the 788.00 million share 50-day moving average.  For the 127th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1315.56 vs. 1213.35, respectively).  The SPX closed above its 200-week moving average (1171.61).
The SPX gapped higher at the open, immediately crossing first resistance at 1335 and opening above 1336.  By 10:00, the index had retreated to its intra-day low of 1332.83, still in positive territory.  Through 11:30, the index staged an uneven rally and climbed to 1337.  The index traded sideways through 1:00 and set the intra-day high on a small move higher to 1337.49 at 12:52.  From 1:00 until 1:45, the index retraced some gains back to 1335.  At 2:30, a rally to 1336.50 was sold back to 1335.  A closing bell rally began at 3:30 and too the index nearly back to its intra-day high at the bell.   
Technical indicators are mixed but improving.  While moving day averages are configured bullishly and the market has resumed its uptrend, the SPX has not achieved new highs nor broken through important resistance levels, indicating potential weakness.  The index closed above 1300 for the 21st straight session.  The index closed above its April 2010 highs for the 97th straight session.  The SPX closed (by +1.07%) above its 20-day moving average (1323.27) for the second consecutive session.  The index closed (by +1.66%) above its 50-day moving average for the second straight session.  The index closed (by +3.58%) above its 100-day moving average for the 25th straight session.  The SPX closed +10.22% above its 200-day moving average.  All moving day averages increased.  The directional momentum indicator switched to positive for the first time in nine sessions, and the trend is decreasing.  Relative strength rose to 60.11 from 57.22, a neutral range.  Next resistance is at 1338.97; next support is at 1334.31. 
BKX.  On lower volume, the KBW bank index rose +0.21 points, or +0.42%, to 50.47.  Volume fell -19.2% to 111.41 million shares, down from 137.93 million shares Wednesday and below the 122.14 million share 50-day average.  The index closed +17.43% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -12.91% and -9.28% below its April  23,  2010, and February 14, 2011 closing highs, respectively. 
Financials outperformed the market for the first time in seven sessions, and large-cap banks performed in-line with regionals.  The BKX gapped higher at the open to 50.50, fueled by earnings strength and potentially short covering.  Momentum quickly reversed and the index fell through 10:00, setting its intra-day low at 49.88, a support level.  Support held, and the index’s momentum reversed again.  By 10:30, the index rose back to 50.15, but still in negative territory.  At 11:00, a rally began that took the index back to break-even by 11:30 and to the intra-day high of 50.49 just before 1:00.  Gains retraced during the afternoon, but a rally at 3:300 lifted financials almost back to their intra-day high at the bell.   
Technical indicators are turning negative.  The BKX has remained bound on the upside by the 50-day moving average (now at 52.37 and falling) and has fallen through the 100-day moving average (52.44).  It remains modestly above a rising 200-day moving average (49.51).  The 20-day moving average has remained below the 50-day moving average since March 11th  and crossed below the 100-day moving average on April 15th.  The 50-day moving average crossed below the 100-day moving average on Thursday.  The index closed below the 20-, 50-, and 100-day moving averages for the seventh, 11th, and seventh, consecutive sessions, respectively.  The index closed above 50 for the 85th straight day.  The BKX closed above its 200-day moving average for the 91st straight session.  The 20- and 50-day moving averages fell.  The 20-day closed (by -0.73 points) below the 50-day for the 28th straight day, but the negative divergence contracted.  The 50-day moving average closed (by +2.92 points) above the 200-day moving average for the 69th straight session, but the positive divergence contracted.  The 100-day moving average closed (by +2.86 points) above the 200-day moving average for the 52nd straight session, and the positive divergence expanded.  The directional movement indicator is negative for the seventh consecutive day, and the trend is increasing.  Relative strength rose to 35.53 from 32.52, the low end of a neutral range.  Next resistance is 50.68; next support at 50.06.

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