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Durable Goods Weakness Pushes U.S. Equity Futures Lower

|Includes: BK, BOKF, C, COF, FHN, Fifth Third Bancorp (FITB), SNV, STT, V, ZION
This morning.  U.S. equity markets remain in correction.  After fair value adjustment, U.S. equity futures are moderately lower, weakening after a disappointing April durable goods report. World equity markets, U.S. Treasuries, and the U.S. dollar are mixed. Commodities markets are somewhat stronger. Lower copper inventory reports suggest some rebound in world manufacturing activity. After a fair value adjustment of +0.88 points, June SPX equity futures are at 1310.10, down -4.38 points.  The SPX opens at 1316.28, -3.47% below its recent April 29 multi-year closing high and -0.73% below its 50-day moving average.  The SPX is +0.85% above April’s lowest closing low of 1305.14.  Next resistance is at 1322.04.  Next support is at 1312.19.
On Tuesday, U.S. equities ended mixed, on mixed volume. The NYSE composite managed a +0.19% gain, while the Nasdaq, DJI, and SPX declined -0.46%, -0.20%, and -0.08%, respectively.  Early strength quickly faded to modest intraday losses, before rallying after 1:30. Markets turned higher and reached intraday highs around 3:30, but investors sold the rally and equities faded into the close. U.S. economic news was light, but mixed as April new home sales surprised positively, but the Richmond Fed manufacturing index for May disappointed with a negative mark.  Most market segments closed mixed, with oil and gas, basic materials, and telecommunications ending higher, while technology, consumer services, and industrials suffered moderate losses. Market breadth was negative but up volume exceeded down volume.  The distribution day count declined to 6 on the NYSE, but were unchanged at 6 on the SPX and Nasdaq, and 5 on the DJI in the past 25 trading days.  BKX has seen 4 distribution days.  Distribution days indicate institutional selling.  Volatility mirrored equities’ performance, falling at the open, trending higher until the afternoon rally ensued, weakening and then strengthening into the close. The VIX ended at 17.82, down -2.46%, from 18.27 at Monday’s close.
Asian and Eurozone equity markets are also in correction.  Earlier today, the Nikkei closed -0.57% lower on a +0.86% increase in volume.  Oil and gas, financials, and consumer goods were the best performers, while utilities, industrials, and telecommunications closed at least -1.15% lower.  Financials rose +0.21%.  In China, the Hang Seng and Shanghai composite closed mixed, +0.07% and -0.91%, respectively.  On the SHCOMP, volume fell -0.54% from the prior day’s quiet trade.  The SHCOMP closed at 2741.74, -10.3% below its recent April 18th high 3057.33 and now -2.36% below its 2010 close and below the 200-day moving average.  An early rally attempt failed, and the index trended lower through the day’s remainder to end just above its 2737.33 intraday low.  Oil and gas closed +0.88% higher; all other market segments closed lower. Financials were the 8th worst performing segment, down -1.55%.  Trading desks cited earnings concerns and slowing economic growth to explain the lower trade.  In Europe, equity markets are mixed, with particular strength in utilities, financials, and consumer services, and weakness in industrials, health care, and basic materials.  The EuroStoxx 50, FTSE, and DAX are +0.02%, -0.03%, and -0.06%, respectively.  On the EuroStoxx, financials are the 2nd best performing segment, up +0.90%.  Financials benefited on views that the Greece would meet IMF tests.
Despite sovereign debt and other macro-concerns, LIBOR levels are at their lowest levels since early 2009, well below those seen prior to last year’s sovereign debt crisis, and continue to drift lower.  Overnight USD LIBOR wash unchanged at +0.12900%, compared to 0.13000% Tuesday and 0.25188% at year-end.  USD 3-month LIBOR declined to 0.25450%, compared to 0.25500% Tuesday and 0.30950% at year-end.  The U.S. dollar is mixed, slightly stronger against the euro and yen, slightly weaker vis-à-vis the pound.  The dollar, which has trended lower since last June, trades below its 50- and 100-day moving averages, but above its 200-day moving average.  The euro trades at US$1.4065, compared to US$1.4100 Tuesday and US$1.4048 the prior day.  Since early May, the Euro has trended lower.  It still trades well above its 200-day moving average, but has moved below its US$1.4348 50-day moving average and is approaching its US$1.3986 100-day moving average.  The dollar trades at ¥82.09, compared to ¥81.95 Tuesday and ¥82.01 the prior day.  The yen trades better than its 50-day moving average ¥82.05, which is trending lower.  U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.535% and 3.116%, respectively, compared to 0.503% and 3.114% Tuesday.  The yield curve narrowed to +2.581% from +2.611% 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 generally higher, with higher energy, mixed precious metals, higher aluminum and copper, and higher agriculture. 
U.S. news and economic reporting.  Today’s focus is April durable goods for April, the latest week’s MBA mortgage applications, and March and 1Q2011 house price purchase index.
Overseas news.   Today, Finland’s parliament approved Portugal’s bailout package.  In the first quarter, U.K. GDP rose +0.5% over the prior quarter, in line with estimates.  In April, Japan’s trade balance fell to a deficit on lower exports. 
Company news/research:
·         None.
1Q2011 Earnings.  The first quarter’s earnings results have so far exceeded EPS and revenue expectations.  Of the 460 S&P500 companies that reported earnings to date, 72% (332 of the 460) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies have beat by an average of +7.0% (versus a historical average of +2%).  EPS is up +19.8% over the prior year.  Though challenged in the current operating environment, 347 companies (75%) reported increased revenues and 308 companies (67%) 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 13.3x estimated 2011 earnings ($99.08) and 11.7x estimated 2012 earnings ($112.22), compared to 13.3x and 11.7x 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 +4.7%, and +4.6%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.9% and +32.4%, respectively.
Large-cap banks trade at a median 1.45x tangible book value and 12.5x 2011 consensus earnings, compared to 1.46x tangible book value and 12.6x 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 70.9%, respectively. 
Tuesday’s equity markets.  On mixed volume, the equity markets finished mixed. The NYSE managed to finish the day up +0.19% on minimally higher volume. The Nasdaq, DJI, and SPX closed lower, off -0.46%, -0.20%, and -0.08%, respectively, on less volume.  The markets began the day higher, but investors sold the rally, and equities trended lower after the first hour. The sell-off continued through 1:00, but equities rallied with some strength in the final hour before losing momentum into the close. U.S. economic news was mixed with a surprise increase in new homes sales, but a continuation of poor manufacturing reports from the eastern Fed districts. The Richmond Fed Manufacturing Index reported a -6 versus estimates of +9 and last month’s report of +10, following negative manufacturing reports from Philadelphia and Chicago.  Dallas reports it manufacturing activity on May 31st.  Despite markets in correction since May 4th, trading desks report that overall action is defensive, without much conviction.  Investors remain mostly on the sidelines, with some de-risking and few new shorts given the market’s resilience in recent months. The VIX finished the day at 17.82, off -2.46%.
Technical indicators are generally negative. The NYSE and Nasdaq finished below their respective 50- and 100-day moving averages, but above their 200-day averages. The SPX and DJI finished below their respective 50-day moving averages, but above their 100- and 200-day moving average.  Intraday, the SPX briefly touched its 100-day moving average, but never broke through. Support levels for the SPX remain 1309, with additional support at 1305-1300, April’s closing lows.  The upside resistance for the SPX remains 1330. The Bloomberg NYSE new net highs were -25 versus the previous day’s 44.  The relative strength indicator rose to 39.26 from Monday’s reading of 37.99, reflecting oversold conditions.
Market segments were mixed. Oil and gas, basic materials, and telecommunications were positive and the leaders. The laggards were technology, consumer services and industrials.
Financials were middling performers, but ended lower.  The KRX, XLF, and BKX all finished lower, off -0.27%, -0.13%, and -0.10%, respectively.  The BKX began the day at its highs and sold off sharply through the morning.  The BKX managed an intraday reversal just after noon and finished the day on strength.  Action in C, which traded to $39.41 intraday, but ended at $40.50, seemed to spark the rally in the larger banks.  The BKX had 12 names advance and 12 decline.  Leaders included FITB (+0.89%), C (+0.82%), and ZION (+0.52%). The laggards were BK (-1.15%), STT (-1.51%), and COF (-1.96%).  The KRX finished with 19 names up, 29 down and 2 unchanged.  Leaders included SNV, FHN, and BOKF.  Among other financials, AVB, HCN, and V were the leaders, up at least +0.88%.  The BKX and XLF finished the day below their respective 50-, 100-, and 200-day moving averages. The KRX was below its 50- and 100-day moving average, but above the 200-day average.  While the broader indices have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -15.6% below its April 2010 high and -40.7% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume rose a slight +0.18% to 868.40 million shares, from 866.82 million shares Monday, 0.91x the 50-day moving average.  Market breadth was negative, but up volume led down volume.  Advancing stocks lagged decliners by -238 (compared to -1784 Monday), or 0.85:1.  Up volume lagged down volume by 1.10:1.
SPX.  On lower volume, the SPX fell -1.09 points, or -0.08%, to end at 1316.28.  Volume fell -1.31% to 658.48 million shares, down from 667.20 million shares Monday and below the 755.54 million share 50-day moving average.  For the 149th consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1326.01 vs. 1239.99, respectively).  The SPX closed above its 200-week moving average (1167.16).
The SPX gapped higher at the open, opening above 1320.  By 10:20, the index rallied to its intra-day high of 1323.72.  Momentum reversed at 10:30, and within minutes the index fell below the 1320 level.  By 11:00, the index retraced gains back to the 1318 level, just above break-even.  Two rally attempts at 11:05 and 11:30 to the 1320 level were sold.  Through 1:35, the index fell consistently, crossing into negative territory by 11:45 and reaching the intra-day low of 1313.87 at 1:35.  Through 3:30, the index staged a rally that retook break-even by 2:15 and crossed 1320 by 3:25.  The rally was quickly sold at the 1320-level, and the SPX retraced gains back to break-even by 3:45 and turned negative just prior to the closing bell.  The index finished with a modest lost.  
Technical indicators are turning negative.  The index’s failure at 1370 and subsequent fall put equity markets in correction on May 4th.  The index broke down through its 50-day moving average but found support at the 100-day moving average (1314.27), which is -11.75 points below the 50-day average.  The index’s correction has stalled the 50-day average’s positive momentum, and the 50-day will likely cross below the 100-day moving average in early June.  The index closed above 1300 for the 43rd straight session.  The index closed above its April 2010 highs for the 119th straight session.  The SPX closed (by -2.00%) below its 20-day moving average (1343.09) for the eighth straight session.  The index closed (by -0.73%) below its 50-day moving average for second straight session.  The index closed (by +0.15%) above its 100-day moving average for the 48th straight session.  The SPX closed +6.15% above its 200-day moving average.  The 20-day moving average fell for the second third session.  The directional momentum indicator is negative for the 10th straight session, and the trend is weak but increasing.  Relative strength fell to 40.86 from 41.28, the lower end of a neutral range.  Next resistance is at 1322.04; next support is at 1312.19. 
BKX.  On higher volume, the KBW bank index fell -0.05 points, or -0.10%, to 48.92.  Volume rose +2.26% to 67.38 million shares, up from 65.89 million shares Monday but below the 104.37 million share 50-day average.  Recent low volume levels versus historical averages relates to Citigroup’s May 6th 10-1 reverse split.  The BKX closed +13.82% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -15.58% and -12.06% below its April 23,  2010, and February 14, 2011 closing highs, respectively. 
Financials performed in-line with the market, and regionals underperformed large-cap banks.  The BKX opened modestly higher.  By 9:37, the index set its intra-day high of 49.16.  Through noon, the index fell consistently, crossing into negative territory by 10:30, breaking down through first support at 48.72 by 11:25, and reaching the intra-day low of 18.54 at 12:00.  Through 2:15, the index traded in a tight 48.55 – 48.70 range.  At 2:15, a rally commenced which lasted through 3:45 and retook the break-even line at 3:25 and crossed above the 49.00 level at 3:35.  At 3:45, the rally was sold, and the BKX retreated to negative territory just prior to the close.  The index held above the 48.90 level and finished with a modest loss. 
Technical indicators are negative.  Weakness in the broader markets has removed support for financial stocks, which have underperformed the broader markets since January.  The index  remains bound on the upside by the 50-day moving average (now at 51.19 and falling) and closed below the 200-day moving average (49.74) for the third straight day.  The 20-day moving average (50.55) has remained below the 50-day moving average since March 11th  and crossed below the 100-day moving (52.38) 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-, 100-, and 200-day moving averages for the 10th, 33rd, 29th, and third consecutive sessions, respectively.  The index closed below 50 for the third straight session.  The 20-, 50-, and 100-day moving averages fell.  The 20-day closed (by -0.64 points) below the 50-day for the 50th straight day, and the gap expanded.  The 50-day moving average closed (by +1.46 points) above the 200-day moving average for the 91st straight session, but gap narrowed.  The 100-day moving average closed (by +2.64 points) above the 200-day moving average for the 73rd straight session, but gap narrowed.  The directional movement indicator is negative for the 13th straight session, and the trend is increasing.  Relative strength fell to 33.54 from 33.86, the lower end of a neutral range.  Next resistance is 49.21; next support at 48.58.