Futures Advance as Earnings Reports Surprise
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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. Earnings reports continue this morning with the release of 1Q2011 reports from Merck (MRK, positive EPS and revenue beats) and Boeing (BA, positive EPS, but revenue shortfall). Equity markets are in a confirmed uptrend. Equity futures are moderately higher. The dollar is mixed. Commodity prices are mixed. U.S. Treasury prices are slightly weaker. The U.S. dollar is at its weakest since late 2009. After a fair value adjustment of +2.39 points, June SPX equity futures are at 1345.80, up +2.51 points. The SPX opens at 1347.24, a new 2011 and multi-year high and +2.36% above its 50-day moving average. Next resistance is at 1352.28. Next support is at 1339.48.
On Tuesday, U.S. equity markets closed higher, at new multi-year highs. Markets gapped higher, gathered strength through midday, and traded within narrow ranges through the afternoon and closed near their intraday highs. The DJI posted the best gain, closing up +0.93% at 12595.37, a new post-Lehman high. Market breadth was positive. Volatility declined early, but drifted higher through the afternoon session. 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.
Earlier today, Asian equity markets closed mixed. The Nikkei closed up +1.39%, with the gains attributed to improving U.S. confidence, strong 2Q2011 earnings, and rising stock prices. Financials were the worst performing segment, but closed up +0.36%. In China, the Hang Seng and Shanghai Composite closed down -0.48% and -0.46%, respectively. On the SHCOMP, volume rose +11.4% from the prior day. Traders attributed the day’s weakness to earnings disappointments. The index initially traded higher, but lost ground after mid-day. A late rally narrowed the day’s losses. The index closed at 2925.41. Chinese equity markets are in a confirmed uptrend, but have lost ground for four consecutive days, with a distribution day yesterday. The index is up +9.26% since it correction-low close on January 25th. European equity markets are higher, with gains attributed to a strong earning season. The EuroStoxx 50, FTSE, and DAX, are up +0.73%, +0.23%, and +0.82%, respectively. On the EuroStoxx, financials are the 8th worst performing market segment, up +0.35%. 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 0.13475%, down from 0.13500% the prior day and compared to 0.25188% at year-end. USD 3-month LIBOR is 0.27325%, compared to 0.27275% the prior day and compared to 0.30950% at year-end. In early trading, the dollar is slightly weaker against the euro and pound, but slightly better against 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$1.4664, compared to US$1.4644 Tuesday and US$1.4582 the prior day. The Euro trades well above its 50-, 100-, and 200-day moving averages. The dollar trades at ¥82.30, compared to ¥81.55 Tuesday and ¥81.83 the prior day. The yen trades above its 200-day moving average ¥82.44, which is trending lower. U.S. Treasury yields are slightly lower, with 2- and 10-year maturities yielding 0.672% and 3.344%, respectively, compared to 0.603% and 3.307% Tuesday. The yield curve narrowed to +2.672%, from +2.704% 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 mixed, with higher petroleum and natural gas, mixed precious metals, aluminum, and copper, and lower agricultural prices.
U.S. news and economic reporting. Bank earnings reports have largely concluded. Economic releases focus on March durable goods. The FOMC concludes its two-day meeting with release of its statement at 12:30. At 2:15, Bernanke initiates post-meeting press conferences.
Overseas news. In 1Q2011, U.K. GDP rose +0.5% over the prior quarter, in-line with estimates. In May, the German GfK consumer confidence index declined more than expected. This week, Chinese news reports indicate officials will enacted additional potential residential and commercial property curbs in May. Today, saboteurs blew up an Egyptian gas pipeline serving Israel and Jordan.
· BCS – reports 1Q11 earnings of £1.01 billion versus estimates of £1.21 billion
· PVTB – raised to outperform at KBW, price target raised to $18 from $14
· SNV – price target lowered to $2.50 from $2.75 at BofA/ML, maintains underperform
· COF – price target raised to $65 from $56 at BofA/ML, maintains buy rating
1Q2011 Earnings. The first quarter’s earnings results have so far exceeded EPS and revenue expectations. Of the 175 S&P500 companies that reported earnings to date, 78% (136 of the 175) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies have beat by an average of +9.1% (versus a historical average of +2%). EPS is up +18.3% over the prior year. Though challenged in the current operating environment, 128 companies (74%) reported increased revenues and 123 companies (72%) 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 ($98.15) and 12.1x estimated 2012 earnings ($111.34), 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 +3.7%, and +3.8%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +15.8% and +31.3%, respectively.
Large-cap banks trade at a median 1.54x tangible book value and 13.0x 2011 consensus earnings, compared to 1.54x tangible book value and 12.7x 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 +32.5% and 71.6%, respectively.
Tuesday’s equity markets. On heavier volume, most markets surged to new highs. The DJI, SPX, NYSE, and Nasdaq finished the day higher, up +0.93%, +0.90%, +0.82%, and +0.77%, respectively. The SPX and DJI finished at levels they have not seen since June 2008 (1347.24, 12,595.37). Earnings from F and MMM that exceeded analyst’s expectations helped propel the major averages higher. The indices saw their lows at the open, moved higher through the morning, and then traded in a flattish range during the afternoon. The SPX and Nasdaq saw their highest point at noon, while the DJI and NYSE saw their respective highs towards the close. Economic news was mixed with the S&P/Case-Shiller home price index falling -3.3% in March to 139.27 and the Conference Board’s consumer confidence index rising to 65.4 from a revised reading of 63.8 in March. Investors seem to be expecting a statement from the Federal Open Market Committee meeting on Wednesday that will indicate a continued ease in monetary policy. Trading desks report good order flows by both large accounts and hedge funds and a lack of short sellers willing to step in front of this tape. The VIX finished the day at 15.62, off -0.95%.
Technical indicators were positive. The SPX finished at 1347.22, above what had become major resistance at 1344. The SPX had finished within 1% of 1344 on eight separate occasions this month. All the major indices went through multiple resistance levels during the day. Volume was strong in this rally and that was the once piece that had been missing in other advances to new highs. All of the major averages finished above their 50-, 100-, 200-day and 200-week moving averages. The Bloomberg NYSE new net highs were +165 versus Monday’s +203 and above the key moving averages. The relative strength index rose to 61.92 from Monday’s 57.86 and in the higher end of a neutral range.
Market segments were all positive. The strongest sectors were industrials, telecommunications, and oil and gas, each up at least 1.18%. The laggards, though positive, were financials, consumer goods, and consumer services.
· The KRX, BKX, and XLF all finished the day up, +1.32%, +0.85%, and +0.62%, respectively. The KRX had a very strong day, with 41 names up and 9 down. The leaders were UMBF (+7.10%), COLB (+3.65%), and FULT (+3.59%). Among the large cap names, the leaders were RF (+2.66%), STT (+2.22%), and CMA (+2.03%). The BKX finished well, with 20 names up and 4 down. The KRX finished above its 20-, 50-, 100-, and 200-day and 200-week moving average. The BKX and XLF closed below their 20-,50-, 100-day moving averages, 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 -12.2% below its April 2010 high and -38.3% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume improved, but remained under the 50-day moving average. Volume rose +30.3% to 909.36 million shares, from 697.93 million shares the prior day, 0.92x the 50-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +1362 (compared to -259 Monday), or 2.62:1. Up volume led down volume by 2.36:1.
SPX. On higher volume, the SPX rose +11.99 points, or +0.90%, to 1347.24, a new multi-year high. Volume rose +36.0% to 766.57 million shares, up from 563.50 million shares on post-holiday weekend Monday, but below the 780.96 million share 50-day moving average. For the 129th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1316.19 vs. 1215.98, respectively). The SPX closed above its 200-week moving average (1170.82).
The SPX gapped modestly higher at the open, immediately setting its intra-day low crossing first resistance at 1338. The index rallied through noon, crossing 1340 at 9:45 and 1345 at 10:45. At 12:04, the SPX set its intra-day high of 1349.55. Buyers took a breather, and by 1:30, the index retraced to 1346. A modest rally took the index back to 1349 by 3:15. Failing to break through that level, the SPX traded back below 1348 by 3:30, but held near that level into the close.
Technical indicators have turned positive. Yesterday’s fresh multi-year high on higher volume strengthened the market’s uptrend. The index closed above 1300 for the 23rd straight session. The index closed above its April 2010 highs for the 99th straight session. The SPX closed at the highest level since June 17, 2008. The SPX closed (by +1.59%) above its 20-day moving average (1326.19) for the fourth consecutive session. The index closed (by +2.36%) above its 50-day moving average for the fourth straight session. The index closed (by +4.10%) above its 100-day moving average for the 27th straight session. The SPX closed +10.79% above its 200-day moving average. All moving day averages increased. The directional momentum indicator is positive for the third straight session, and the trend is stable. Relative strength rose to 63.59 from 58.81, moving into the higher end of a neutral range. Next resistance is at 1352.28; next support is at 1339.48.
BKX. On higher volume, the KBW bank index rose +0.43 points, or +0.85%, to 50.91. Volume rose +26.4% to 122.88 million shares, up from 97.18 million shares Monday and above the 122.06 million share 50-day average. The index closed +18.5% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -12.2% and -8.48% below its April 23, 2010, and February 14, 2011 closing highs, respectively.
Financials underperformed the market, and regionals outperformed large-cap banks. The BKX gapped higher at the open, immediately crossed first resistance at 50.60 and breached 50.70 at 9:45. At 10:00, a small sell-off retraced gains back to break-even by 10:05, but momentum promptly reversed. The BKX rallied with the broader markets through noon, reaching 50.88 at 12:04. Unlike the broader markets, the BKX traded sideways instead of down through the early afternoon. A rally at 2:15 took the index to its intra-day high of 50.93 at 2:21. The index traded in the mid-50.80 level between 2:30 and 3:30. A closing bell rally lifted financials above 50.90 at the close and the index finished just below its intra-day high.
Technical indicators are negative, but the broader market’s strength has provided the BKX support. The BKX remains bounded on the upside by the 50-day moving average (now at 52.24 and falling), below the 100-day moving average (52.43), but above a rising 200-day moving average (49.52). 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 April 21st. The index closed below the 20-, 50-, and 100-day moving averages for the ninth, 13th, and ninth consecutive sessions, respectively. The index closed above 50 for the 87th straight day. The BKX closed above its 200-day moving average for the 93rd straight session. The 20- and 50-day moving averages fell. The 200-day moving average rose, reversing its one-day decline. The 20-day closed (by -0.64 points) below the 50-day for the 30th straight day, but the negative divergence contracted. The 50-day moving average closed (by +2.73 points) above the 200-day moving average for the 71st straight session, but the positive divergence contracted. The 100-day moving average closed (by +2.92 points) above the 200-day moving average for the 54th straight session, and the positive divergence expanded. The directional movement indicator is negative for the ninth consecutive day, and the trend is stable. Relative strength rose to 42.26 from 35.69, a neutral range. Next resistance is 51.06; next support at 50.62.
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