This morning. Spurred by the U.S.’s military success overnight, U.S. equity futures are moderately higher. Equity markets are in a confirmed uptrend, having closed Friday, for the 4th consecutive day, at new multi-year highs. The dollar is slightly lower. Commodity prices are generally lower. U.S. Treasury prices are lower. After a fair value adjustment of +0.16 points, June SPX equity futures are at 1367.10, up +7.14 points. The SPX opens at 1363.61, a new 2011 and multi-year high and +3.47% above its 50-day moving average. Next resistance is at 1365.88. Next support is at 1360.01.
On Friday, U.S. equity markets surprised again by pressing through resistance and closing modestly higher on better if still unimpressive volume. Economic reports were mixed, markets briefly lagged in early trading, and traded without much direction through the morning, but strengthened through the afternoon and ended near their closing highs. The DJI and NYSE composite posted the best gains (+0.37%), followed by the SPX (+0.23%) and Nasdaq (+0.04%). Market breadth was positive. After 2:00, volatility rose modestly, reaching 14.99 on the VIX, before weakening into the close. 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.
British and Chinese equity markets are closed. Japanese equity markets closed higher on positive U.S. economic news. Financials were the 2nd best performing market segment, up +2.72%. Chinese equity markets are in a confirmed uptrend, but have lost ground in five of the past six trading days, with a distribution day Wednesday. The index is up +8.74% since it correction-low close on January 25th. European equity markets are mostly higher. The EuroStoxx 50 and DAX, are up +0.37% and +0.24%, respectively. On the EuroStoxx, financials are a middling performing market segment, up +0.20%. The FTSE is closed.
Despite sovereign debt and other macro-concerns, LIBOR levels are below those seen prior to last year’s sovereign debt crisis. Due to the wedding, Libor markets are closed again today. 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, 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$1.4838, compared to US$1.4807 Friday and US$1.4822 the prior day. The Euro trades well above its 50-, 100-, and 200-day moving averages. The dollar trades at ¥81.47, compared to ¥81.19 Friday and ¥81.54 the prior day. The yen trades better than its 200-day moving average ¥82.33, which is trending lower. U.S. Treasury yields are slightly lower, with 2- and 10-year maturities yielding 0.617% and 3.314%, respectively, compared to 0.601% and 3.286% Friday. The yield curve narrowed to +2.697%, from +2.685% 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 lower, with lower petroleum, natural gas, precious metals, aluminum, higher copper, and mixed agricultural prices.
U.S. news and economic reporting. Economic releases focus on March construction spending and April ISM manufacturing.
Overseas news. Last evening, U.S. forces killed Osama bin Laden in Pakistan. In April, China’s manufacturing purchaser managers’ index fell, missing estimates for a gain but remained above an expansionary level. This weekend, Yemen’s President refused to step down from power in exchange for prosecutorial immunity, re-escalating tensions with opposition protesters.
· GS – Berkshire Hathaway (BRK) will continue to hold the warrants received as a part of its 2008 investment in GS.
1Q2011 Earnings. Earnings results have so far exceeded EPS and revenue expectations. Of the 299 S&P500 companies that reported earnings to date, 77% (229 of the 281) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies have beat by an average of +8.30% (versus a historical average of +2%). EPS is up +22.9% over the prior year. Though challenged in the current operating environment, 230 companies (77%) reported increased revenues and 210 companies (70%) 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 $98.55 from $98.30) and 12.2x estimated 2012 earnings (increased to $111.71 from $111.43), compared to 13.8x and 12.2x 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 +4.2%, and +4.1%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.2% and +31.8%, respectively.
Large-cap banks trade at a median 1.56x tangible book value and 13.1x 2011 consensus earnings, compared to 1.56x 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 +32.7% and 71.6%, respectively.
Friday’s equity markets. On somewhat heavier volume, equity markets closed at new multi-year highs. The DJI and NYSE both advanced +0.37%, while the SPX and Nasdaq were up +0.23% and +0.04%, respectively. The markets opened higher, saw their lows early in the session, and advanced to their intraday highs in early afternoon. Markets gave ground in mid- afternoon, but rallied through the last half hour to finish just off their highs. The Nasdaq has advanced eight consecutive sessions, while the DJI, SPX and NYSE have advanced for four sessions in a row. This past week, markets advanced on better earnings and mixed economic news. Friday’s earnings were mostly positive with GT, CAT, and CVX exceeding analysts’ estimates and PBI and CSE missing estimates. Economic news was mixed as personal income was reported in line with estimates, but the Chicago Purchasing Managers Index (67.6 vs. 68.2) and University of Michigan consumer confidence index (69.8 vs. 70) were lower than expected. Trading desks report that customers have seemed surprised by the strength of the markets, with some accounts not prepared for this latest rally. Volatility continues to decline, with the VIX below 17 for the past 12 sessions. The VIX finished Friday at 14.75, up +0.89%.
Technical indicators are positive. New highs on increased volume suggest that the uptrend will shortly test resistance at 1367. Support is at the 1338-1344 range. All the major averages finished above their 50-, 100-, 200-day, and 200-week moving averages. The Bloomberg NYSE new net highs were +319 versus Thursday’s +267, and well above key moving averages. The relative strength indicator rose to 67.85 from 66.29 Thursday and is in the higher end of a neutral range.
Market segments were mixed. Oil and gas, basic materials and industrials were the leaders while health care, financials, and telecommunications were the laggards.
Financials were negative Friday, with the KRX, BKX, and XLF all lower, down -0.60%, -0.53%, and -0.18%, respectively. On the BKX, 10 names advanced, 13 declined, and 1 ended unchanged. The KRX had 6 names advance, 43 decline and 1 unchanged. Leaders among the larger cap financials include FNFG (+1.41%), USB, and BK, both up +1.33%. The laggards were RF (-1.34%), BAC (-1.13%) and FITB (-1.12%). Smaller cap names were ONB, FULT, and FHN. The laggards were HCBK (-3%), UMPQ (-2.11%), and WTNY (-1.81%). In April, financial stocks lagged the SPX, despite reported earnings in excess of expectations. Investors seemed disappointed with a lack of top line strength and sought names that showed increases in loan growth or other revenue items. The BKX remains below its 50-, and 100-day moving average, but above the longer term averages. The XLF is below its 50-day moving average, but above the 100-, 200-day and 200-week average. The KRX is above all the major moving averages. While the broader indices have recovered their post-September 2008 losses, bank stock have not, with the BKX closing -11.1% below its April 2010 high and -37.6% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume rose +1.43% to 975.24 million shares, from 961.53 million shares the prior day, 0.98x the 50-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +917 (compared to +691 Thursday), or 1.88:1. Up volume led down volume by 1.48:1.
SPX. On higher volume, the SPX rose +3.13 points, or +0.23%, to 1363.61, the index’s 4th consecutive multi-year closing high. Volume rose +48.2% to 1.142 billion shares, up from 770.50 million shares Thursday and above the 791.15 million share 50-day moving average. For the 132nd consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1317.86 vs. 1219.94, respectively). The SPX closed above its 200-week moving average (1170.91).
The SPX opened flat, but quickly moved into positive territory. At 9:50, the index reached 1362 when momentum reversed, and the index fell. The index crossed into negative territory at 9:55 and fell to its intra-day low of 1358.69 at 10:00. Buyers bought the dip, and the index quickly returned to break-even by 10:15. At 11:20, a rally took the index through 1363 by 11:50. Through 1:30, the SPX traded sideways at that level, a first-resistance point. At 1:35, the index moved above 1364 but quickly fell afterward, retracing gains back to 1363. A second rally at 2:30 above 1364 to the intra-day high of 1364.56 at 2:40, but this rally was also sold. Through 3pm, the SPX fell, retracing gains back to 1361. A closing bell rally returned the index above 1363, where it finished.
Technical indicators are positive, though the index appears short-term overbought. The SPX set a fourth consecutive multi-year high. The index closed above 1300 for the 26th straight session. The index closed above its April 2010 highs for the 102nd straight session. The SPX closed (by +2.41%) above its 20-day moving average (1331.51) for the seventh consecutive session. The index closed (by +3.47%) above its 50-day moving average for the seventh straight session. The index closed (by +5.03%) above its 100-day moving average (1298.25) for the 30th straight session. The SPX closed +11.78% above its 200-day moving average. All moving day averages increased. The directional momentum indicator is positive for the sixth straight session, and the trend is increasing. Relative strength rose to 69.13 from 68.11, the high end of a neutral range. Next resistance is at 1365.88; next support is at 1360.01.
BKX. On lower volume, the KBW bank index fell -0.12 points, or -0.23%, to 51.53. Volume fell -5.60% to 113.63 million shares, down from 120.36 million shares Thursday and below the 122.29 million share 50-day average. The index closed +20.0% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -11.1% and -7.37% below its April 23, 2010, and February 14, 2011 closing highs, respectively.
Financials’ losses underperformed the market’s gains, and regionals underperformed large-cap banks. The BKX opened flat, setting the intra-day high at the bell off 51.66, but quickly fell. By 10:00, the index had fallen to first support at 51.31, setting the intra-day low. Momentum reversed at the support level, and by noon, the index had rallied to 51.60, 0.05 points shy of the break-even line. Buyers appeared fatigued, and by 1:20, the index had retraced back to 51.40. A rally between 1:20 and 1:50 brought the index back above 51.50, where it traded through 2:45. A second sell-off ensued at 2:45, and the index retreated to 51.40 at 3:30. A closing bell rally lifted the BKX back through 51.50 by 3:50, but financials could not retake the 51.60 threshold or the break-even line and finished with a marginal loss.
Technical indicators are negative, but the broader market’s strength has provided the BKX support. The BKX has remained bound on the upside by the 50-day moving average (now at 52.02 and falling), has broken through 100-day moving average support, but has held above the 200-day moving average (49.57). The 20-day moving average (51.51) has remained below the 50-day moving average since March 11th and crossed below the 100-day moving (52.53) average on April 15th. The 50-day moving average crossed below the 100-day moving average on April 21st. The index closed below the 50- and 100-day moving averages for the 16th and 12th consecutive sessions, respectively. The index closed above its 20-day moving average for the second consecutive session. The index closed above 50 for the 90th straight day. The BKX closed above its 200-day moving average for the 96th straight session. The 20- and 50-day moving averages fell. The 20-day closed (by -0.51 points) below the 50-day for the 33rd straight day, but the negative divergence contracted. The 50-day moving average closed (by +2.45 points) above the 200-day moving average for the 74th straight session, but the positive divergence contracted. The 100-day moving average closed (by +2.96 points) above the 200-day moving average for the 57th straight session, and the positive divergence expanded. The directional movement indicator is positive for the second consecutive session, and the trend is declining. Relative strength fell to 50.16 from 51.65, a neutral range. Next resistance is 51.69; next support at 51.34.