Futures Weaken on Economic Reports
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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. The earnings focus turns to insurance and energy concerns. Equity markets are in a confirmed uptrend, having closed yesterday at new multi-year highs. Equity futures are modestly lower, after mixed earnings reports overnight, disappointing initial jobless claims, and a slightly weaker than expected 1Q2011 GDP report. The dollar is mixed. Commodity prices are mixed. U.S. Treasury prices are slightly stronger. After a fair value adjustment of +0.81 points, June SPX equity futures are at 1348.90, down -2.91 points. The SPX opens at 1355.66, a new 2011 and multi-year high and +2.96% above its 50-day moving average. Next resistance is at 1360.68. Next support is at 1347.44.
On Wednesday, U.S. equity markets closed at new multi-year highs on improving volume. Markets lagged in early trading, but strengthened after release of the FOMC minutes at 12:30, and pushed strongly forward following the start of Bernanke’s subsequent press conference. The Nasdaq posted the best gain (+0.78%), followed by the DJI (+0.76%). Market breadth was positive. Volatility rose through the morning trade, and declined as markets declined through the afternoon. 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 +1.63%, with the gains attributed to Bernanke’s comments, improving U.S. confidence, and strong 2Q2011 earnings. Financials were the 9th worst performing segment, but closed up +0.82%. In China, the Hang Seng and Shanghai Composite closed down -0.37% and -1.31%, respectively. On the SHCOMP, volume fell -0.54% from the prior day. The index closed at 2887.04, falling through support and for the 3rd consecutive day, below the 2954.76 50-day moving average. The index initially traded higher, but lost ground after mid-day. Traders attributed the day’s weakness to interest rate concerns, though financials were the best performing market segment, up +0.38%. Chinese equity markets are in a confirmed uptrend, but have lost ground for five consecutive days, with a distribution day Wednesday. The index is up +7.83% since it correction-low close on January 25th. European equity markets are mixed. The EuroStoxx 50, FTSE, and DAX, are up +0.53%, -0.13%, and +0.51%, respectively. On the EuroStoxx, financials are the best performing market segment, up +1.09%. Deutsche Bank beat estimates and is up +3.83% on the day. 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 0.13375%, down from 0.13475% the prior day and compared to 0.25188% at year-end. USD 3-month LIBOR is 0.27300%, compared to 0.27325% the prior day and compared to 0.30950% at year-end. In early trading, the dollar is 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$1.4796, compared to US$1.4788 Wednesday and US$1.4644 the prior day. The Euro trades well above its 50-, 100-, and 200-day moving averages. The dollar trades at ¥81.74, compared to ¥82.16 Wednesday and ¥81.55 the prior day. The yen trades above its 200-day moving average ¥82.41, which is trending lower. U.S. Treasury yields are slightly lower, with 2- and 10-year maturities yielding 0.625% and 3.333%, respectively, compared to 0.641% and 3.355% Wednesday. The yield curve narrowed to +2.708%, from +2.714% 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 lower petroleum and higher natural gas, mixed precious metals, lower aluminum and copper, and mixed agricultural prices.
U.S. news and economic reporting. Economic releases focus on initial jobless claims for the latest week, the initial read on 1Q2011 gross domestic production, and personal consumption.
Overseas news. Today, hundreds of Syrian ruling party officials resigned over President Assad’s escalating military crackdown on domestic protesters. Last night, the IMF and the European Union agreed on the broad terms for Portugal’s bailout package and will submit the terms to the government tomorrow.
Company news/research:
· BK – cut to equal weight at Morgan Stanley
· BK – announces sale of its Shareowner Services business to Computershare; announces the acquisition of Talon Wealth Management ($800 million in assets).
1Q2011 Earnings. The first quarter’s earnings results have so far exceeded EPS and revenue expectations. Of the 235 S&P500 companies that reported earnings to date, 77% (180 of the 235) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies have beat by an average of +8.6% (versus a historical average of +2%). EPS is up +18.2% over the prior year. Though challenged in the current operating environment, 177 companies (76%) reported increased revenues and 166 companies (71%) 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.
With all 24 BKX members reporting, 75% (18 out of 24) beat operating EPS estimates. Bank revenues disappointed slightly(by -0.78% on average), with 58% of BKX members missing estimates. Eleven banks (46%) reported increased revenues over the prior year’s quarter. In the first quarter of 2011, the BKX earned $0.95 per share, a +4.4% increase over 4Q10 EPS of $0.91 and 180% above 1Q10 EPS of $0.34.
Valuation. The SPX trades at 13.8x estimated 2011 earnings (increased to $98.21 from $98.15) and 12.2x estimated 2012 earnings (increased to $111.43 from $111.34), 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 2011, analysts increased 2011 and 2012 earnings estimates by +3.8%, and +3.8%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +15.8% and +31.4%, respectively.
Large-cap banks trade at a median 1.55x tangible book value and 12.9x 2011 consensus earnings, compared to 1.54x 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 +32.5% and 71.6%, respectively.
Wednesday’s equity markets. On mixed volume, the markets set new highs for a second day. The Nasdaq, DJI, NYSE, and SPX closed up +0.78%, +0.76%, +0.63%, and +0.62%, respectively. The Nasdaq reached 2870.80 intraday, setting a new 10-year high. The major indices opened higher and traded in flattish ranges through the morning, in anticipation of the FOMC minutes release at 12:30. The minutes of the latest meeting indicated no change in current monetary policy. Markets reacted favorably, immediately moving higher and continued their ascent after Chairman Bernanke clarified the statement during his press conference. All the major indices finished near their highs for the day. While the FOMC was a focus for today, earnings and comments from shareholder meetings also impacted the market favorably. GE climbed as much as 3.73% on comments from CEO Immelt about an improving growth picture and its intention to continue to grow its dividend. AMZN rebounded +7.86% after missing earnings, but growing revenue. Trading desks report a busy open, quiet trading through the morning and then busy trading through the afternoon. Traders report a high degree of skepticism about the latest strength in the markets, but that the strength seems to be catching people off-guard and unprepared for this latest move. The VIX finished at 15.35 Wednesday, off -1.73%.
Technical indicators are positive. The combination of increased volume and new major indices multi-year highs support arguments as to the strength of the confirmed uptrend. The DJI and NYSE broke through multiple resistance levels. The SPX traded through a major upside target at 1353 and makes 1420 the next large resistance level. The SPX first major support is below 1335. The Nasdaq and SPX traded briefly through a primary support level early in the session. All the major averages finished above their 50-, 100-, 200-day and 200-week moving averages. Domestic equity funds saw inflows of +$1,930million (4/20) versus the previous week’s +$835 million (4/13). The Bloomberg NYSE new net highs were +298 versus Tuesday’s +165 and above the key moving averages. The relative strength indicator rose to 64.77 from Tuesday’s 61.92 and in the higher end of a neutral range. The latest AAII Bulllish Sentiment reading (4/28) rose to 37.90 from 32.16 the prior week. These are moderate readings, comparing to a recent peak of 63.30 at the end of last year.
Market segments were mixed. Telecommunications, consumer services and health care were the leaders, up at least +1.14%. Technology, basic materials, and oil and gas were the laggards.
The KRX, BKX, and XLF closed higher, up +1.09%, +0.96%, and +0.62%, respectively. The KRX continues a strong advance, up the last 5 trading days and more than 1.0% the past two tradomg days. Leaders Wednesday in the KRX were FMBI (+7.60%), PVTB (+5.15%), and WL (+2.93%). The KRX had 41 names advance and 9 retreat. The BKX has advanced 5 of the last 6 sessions. Wednesday’s leader among the larger cap names were MTB (+2.79%), CMA (+2.32%), and FITB (+2.07%). The BKX finished well, with 21 names advancing, 1 unchanged, and two declining. The BKX and XLF finished below the 20-, 50-, and 100-day moving averages, but above the 200-day and 200-week averages. The KRX was above all the major moving averages. While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with BKX closing -11.3% below its April 2010 high and -37.7% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume improved, but remained under the 50-day moving average. Volume rose +5.67% to 960.95 million shares, from 909.36 million shares the prior day, 0.96x the 50-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +832 (compared to +1362 Tuesday), or 1.77:1. Up volume led down volume by 2.23:1.
SPX. On lower volume, the SPX rose +8.42 points, or +0.62%, to 1355.66, a new multi-year high. Volume fell -2.0% to 751.34 million shares, down from 766.57 million shares Tuesday and below the 782.65 million share 50-day moving average. For the 130th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1316.66 vs. 1217.28, respectively). The SPX closed above its 200-week moving average (1170.87).
The SPX opened with small gains at 1349. Through 11:00, the index fell, turning negative at 10:05 and reaching the intra-day low of 1344.25 at 10:58. Trading sideways with small loses through 12:30, the index responded positively to the Federal Reserve’s monetary policy statement. At 12:35, the index returned to positive territory, but met resistance at 1350 through 2:45. At 2:50, the index broke through 1350 and rallied through 3:45 to the intra-day high of 1357.49. The SPX’s sharp ascent was met with selling, but the index held on to most of its gains into the close, finishing above 1355.
Technical indicators are turning positive. The market set a second consecutive multi-year high. The index closed above 1300 for the 24th straight session. The index closed above its April 2010 highs for the 100th straight session. The SPX closed (by +2.08%) above its 20-day moving average (1328.01) for the fifth consecutive session. The index closed (by +2.96%) above its 50-day moving average for the fifth straight session. The index closed (by +4.64%) above its 100-day moving average (1295.49) for the 28th straight session. The SPX closed +11.37% above its 200-day moving average. All moving day averages increased. The directional momentum indicator is positive for the fourth straight session, and the trend is stable. Relative strength rose to 66.52 from 63.59, the higher end of a neutral range. Next resistance is at 1360.68; next support is at 1347.44.
BKX. On lower volume, the KBW bank index rose +0.49 points, or +0.96%, to 51.40. Volume fell -17.5% to 101.34 million shares, down from 122.88 million shares Tuesday and below the 122.14 million share 50-day average. The index closed +19.59% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -11.30% and -7.60% below its April 23, 2010, and February 14, 2011 closing highs, respectively.
Financials outperformed the market, and regionals outperformed large-cap banks. The BKX opened higher and immediately crossed first resistance at 51.06. By 9:45, the index reached 51.20. Through 11:30, the BKX traded sideways at that level. At 11:30, a small sell-off retraced some gains, but the index remained above the 50.0 threshold. The Federal Reserve’s monetary policy statement release at 12:30 provided a transitory rally to the 51.25 level, but by 12:45, the index was back to 51.10. At 2:30, a strong and sustained rally took hold, and the index climbed straight through 3:20, reaching its intra-day high then of 51.50. Sellers took advantage of the steep run-up. The index fell below 51.40 at 3:50 but managed a small, closing bell rebound to retake that level.
Technical indicators are negative, but the broader market’s strength has provided the BKX support. The BKX remains bound on the upside by the 50-day moving average (now at 52.16 and falling), broke through 100-day moving average support, but has held above the 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 10th, 14th, and 10th consecutive sessions, respectively. The index closed above 50 for the 88th straight day. The BKX closed above its 200-day moving average for the 94th straight session. The 20- and 50-day moving averages fell. The 20-day closed (by -0.59 points) below the 50-day for the 31st straight day, but the negative divergence contracted. The 50-day moving average closed (by +2.64 points) above the 200-day moving average for the 72nd straight session, but the positive divergence contracted. The 100-day moving average closed (by +2.94 points) above the 200-day moving average for the 55th straight session, and the positive divergence expanded. The directional movement indicator is negative for the 10th consecutive day, but has narrowed considerably and the trend is declining. Relative strength rose to 48.69 from 42.26, a neutral range. Next resistance is 51.63; next support at 51.03.
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