U.S. Equity Futures Higher on Encouraging Chinese GDP Growth

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Long/Short Equity, Short-Term Horizon, Medium-Term Horizon

Contributor 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 past three day’s equity market losses are pressuring the U.S. equity market uptrend.  In Asia, equity markets closed higher, on lower volume.  European equity indexes are also higher. U.S. equity futures are higher, but off the best levels of the morning. Asian equities rallied on reports that China’s economy grew at a +9.5% rate in the year ending June 30th, taking some of the edge off recent bearish sentiments. U.S. Treasury prices are lower.  The dollar is weaker.  Commodities markets are mixed, but generally higher.  After a fair value adjustment of -1.46 points, September SPX equity futures are at 1317.00, up +7.76 points.  The SPX opens at 1319.49, -3.66% below its recent April 29 multi-year closing high, but +0.83% above and -0.14% below its respective 20- and 50-day moving averages.  The SPX is +4.45% above its 1257.64 year-end close.  Next resistance is at 1322.76.  Next support is at 1308.92.
Tuesday, U.S. equity markets closed lower on increased volume, adding distribution day count on all the major exchanges.  NYSE volume rose +11.5%, to 0.96x the 50-day moving average.  Market segments were mixed, with utilities and health care posting gains. Consumer goods, technology, and industrials were the laggards. Markets spent much of the day higher, but lost ground in late trading on news that Moody’s had downgraded to junk Irish government debt.  Financials spent most of the day leading the market, but closed -0.29% lower on the late sell-off. The Nasdaq had the largest loss, down -0.74%, followed by DJI, SPX, and NYSE composite, down -0.47%, -0.44%, and -0.44%, respectively. Market breadth was negative and up volume lagged down.  Volatility rose +8.05%, rising intraday to 19.06 in early trading before easing to close at 19.87, from 18.39 at the prior day’s close.  Trading desks reported a busy morning, but quiet afternoon, with rallies met by selling pressure and headline risk governing the overall trade.
The past three days’ losses are pressuring the uptrend that began on June 21st.   The distribution day count rose to 5 on the NYSE composite, 4 on the SPX and DJI, and 3 on Nasdaq.  The BKX count was unchanged at 5 distribution days.  Distribution days signal institutional selling in the prior 25 trading days, or since the commencement of the most recent uptrend.
For the 1st time in the past 4 trading days, Asian equity markets closed higher, though on lower volume.  Market uptrends in Japan and China are also under pressure.  In Japan, the Nikkei rose +0.37%, and closed below 10,000 for the 2nd consecutive day though still well above its 50-, 100-, and 200-day moving averages.  Volume fell -11.9%. The NKY gapped lower to an intraday low of 9887.33, but rallied immediately on positive Chinese economic news. The NKY closed +5.86% since the June 16th correction low.  Most market segments closed higher, led by oil and gas, telecommunications, and industrials. Consumer services, consumer goods, and technology lagged. Financials rose +0.41%.
In China, the Hang Seng and Shanghai composite rose +1.22% and +1.48%, respectively.  Volume fell -29.8% and -4.87%, respectively.  The SHCOMP is +6.65% above its June 20th correction low.  The SHCOMP opened slightly higher and trended higher through the day, ending slightly just below its 2797.27 intraday low.  All market segments rose, with stronger performance from basic materials, health care, and technology. Utilities, telecommunications, and oil and gas lagged, but ended at least +0.56% higher. Financials rose +1.47%. The SHCOMP ended at 2795.48, -8.56% below its recent April 18th 3057.33 high, -0.45% below its 2010 close, and +0.85% above the 2771.98 50-day moving average.  
In Europe, equity markets are also higher, but without much conviction. The EuroStoxx50, FTSE, and DAX are up +0.27%, +0.09%, and +0.44%, respectively.  Equity markets moved slightly lower at the open but moved immediately higher, trended higher through the morning, with profit taking in early afternoon. The EuroStoxx50 is at 2698.92, compared to its 2717.58 intraday high.  Market segments are mixed, with greater strength in telecommunications, industrials, and consumer services. Oil and gas, basic materials, and technology are the laggards. Financials are up +0.13%.
Despite sovereign debt and other macro-concerns, LIBOR levels are near their lowest since early 2009, well below those seen prior to the onset last year of the Eurozone sovereign debt crisis.  Overnight USD LIBOR fell to 0.12400% from 0.12550% the prior day, and down from 0.25188% at year-end.  USD 3-month LIBOR rose to 0.24925% from 0.24900% the prior day, but down from 0.30950% at year-end.  The U.S. dollar is stronger against the euro, pound, and yen.  The dollar trades at US$75.664, above its US$74.98 50-day, but below its 75.23 100-day and 76.96 200-day moving averages.  The euro has rebounded to US$1.4084, compared to US$1.3976 Tuesday and US$1.4029 the prior day.  The Euro trades below its US$1.4320 50-day and US$1.4282 100-day moving averages.  The dollar trades at ¥79.33, compared to ¥79.24 Tuesday and ¥80.26 the prior day.  The yen trades worse than its 50-day moving average ¥80.74.  U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.383% and 2.948%, respectively, compared to 0.351% and 2.877% Tuesday.  The yield curve narrowed to +2.565%, from +2.526% 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 energy, and higher precious metals, aluminum and copper, and agriculture.
U.S. news and economic reporting.  Economic reporting includes MBA mortgage applications for the latest week (-5.1% versus -5.2% the week prior), and June import prices. Bernanke testifies before the House Financial Services Committee at 10:00. Tomorrow’s economic reports include initial and continuing jobless claims, the monthly budget statement for June, June producer prices, retail sales, and May business inventories.
Overseas news:  In the second quarter, China’s GDP grew +9.5% over the prior year’s period, above +9.3% consensus estimates but below the first quarter’s +9.7% growth.  Press reports indicate all 13 German banks will pass the most recent Eurozone stress tests once official results are announced Friday.
Company news/research:
·         COF – reports 2Q11 EPS of $1.97 and revenue of $4.0 billion, beating EPS and revenue estimates of $1.69 and $3.95 billion, respectively.
1Q2011 Earnings.  The second quarter’s earnings results have so far exceed revenue and earnings expectations.  Of the 4 S&P500 companies that reported earnings to date, 75% (3 out of 4) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +11.8% (versus a historical average of +2%).  EPS is up +35.45% over the prior year.  Though challenged in the current operating environment, 100% of companies reported increased revenues over the prior year and 75% beat revenue estimates.  In the second quarter of 2011, analysts estimate the SPX will earn $24.36 per share, compared to $23.06 and $21.17 per share in 1Q11 and 2Q10, a +5.6% and +15.1% increase, respectively.  
Capitol One (COF) pre-released earnings this morning in conjunction with a $2 billion equity offering to fund their pending ING Direct acquisition.  COF beat both revenue and earnings forecasts, reporting $4.0 billion in revenue and $1.97 EPS, compared to revenue and EPS estimates of $3.95 billion and $1.69, respectively.  For the second quarter of 2011, analysts estimate the BKX will earn $0.97 per share, compared to $0.96 and $0.61 per share in 1Q11 and 2Q10, a +1.0% and +59% increase, respectively. 
Valuation.  The SPX trades at 13.2x estimated 2011 earnings ($99.28) and 11.6x estimated 2012 earnings ($112.91), 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 +4.9%, and +5.2%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.1% and +33.2%, respectively.
Large-cap banks trade at a median 1.44x tangible book value and 12.5x 2011 consensus earnings, compared to 1.43x tangible book value and 12.5x 2011 earnings Friday.  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 +31.9% and +68.2%, respectively.
Tuesday’s equity markets. On higher volume, equity markets closed lower.  The Nasdaq lost -0.74%, the DJI fell -0.47%, while both the SPX and DJI declined -0.44%.  Futures initially indicated a much lower open, with the SPX indicating an opening price of 1295 at 4:00 am. However, futures rallied on unsubstantiated rumors of ECB purchases of Club Med sovereign debt. Markets opened flat with the previous day’s close and teased breakeven through the morning session.  Economic news was slightly bearish, but had minimal market impact. Equities turned positive just before noon, but sold off slightly through the early afternoon.  The 2:00 release of the FOMC minutes boosted markets briefly, as discussion of a possible QE3 stimulated an upward move, but rally was short-lived, and markets retreated to minimal gains.  The weakness morphed into a full sell-off after Moody’s downgrade of Irish sovereign debt to junk.  Markets closed at their intraday lows.  Trading desks reported better flows in the morning, and lighter flows through most of the afternoon prior to the Moody’s action, when buyers stepped to the sidelines. Headline risk obviously continues to frame market activity. There are no signs of panicked selling. The VIX finished at its highest level since late June, closing at 19.87, up +8.05%.
Technical indicators are mixed.  Only the Nasdaq broke through a support level, as most of the major indices remained in tight trading ranges.  The SPX is trading near a level that represents a convergence of the index’s mean price of the last 50- and 100-days. The SPX and NYSE finished below their 50- and 100-day moving averages, but above their 200-day moving average.  The DJI and Nasdaq were above their moving averages. The Bloomberg NYSE new net highs were -3 versus a reading of -7 on Monday.  The relative strength indicator fell to 47.45 from Monday’s reading of 49.20, now in the neutral range.
Market segments were mixed. Utilities, health care and telecommunications were the leaders, while consumer goods, technology, and industrials were the laggards.
Financial stocks were middling performers. The KRX finished the day higher, up +0.96%, while the XLF and BKX were lower, off -0.40% and -0.23%.  The BKX began the day lower and then rallied sharply through the first hour.  The BKX finished with 12 names higher and 11 lower, with one unchanged.  Leaders were RF, MTB, and PBCT, each up at least +1.11%.  Laggards were BAC, C, and HBAN, off at least -1.35%.  The KRX finished with 47 names higher, 2 lower and 1 unchanged. Leaders were WTFC, BXS, and PNFP. Laggards included SBIB, SIVB, and SNV.  The BKX and XLF finished below their respective 50-, 100-, and 200-day moving averages. The KRX finished above the 50- and 200-day averages, but below its 100-day average.  While the broader indexes have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -19.1% below its April 2010 high and -43.2% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume rose +11.5% to 924.46 million shares, from 829.43 million shares Monday, and 0.96x the 975.05 million share 50-day moving average.  Market breadth was negative, and up volume lagged down volume.  Advancing stocks trailed decliners by -482 (compared to -2168 Monday), or 0.72:1.  Up volume lagged down volume by 0.48:1.
SPX.  On higher volume, the SPX fell -5.85 points, or -0.44%, to 1313.64.  Volume rose +14.66% to 727.76 million shares, up from 634.72 million shares Monday but below the 740.42 million share 50-day moving average.  For the 181st consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1315.44 vs. 1274.14, respectively).  The SPX closed above its 200-week moving average (1161.66).
The SPX gapped flat at 1319 and through 9:55, fluctuated with modest losses at the 1316-18 level.  At 10:00, the index crossed into positive territory, but could not break out significantly above the break-even line.  Through 2:00, the index alternated between losses and gains for the day.  The 2:00 release of the Federal Reserve’s June meeting minutes sparked a sharp rally.  By 2:20, the index rallied to 1327.17, setting the intra-day high.  Sellers sold in force, and the index retraced to breakeven by 3:15, and fell into the close.  At 3:50, the index set its intra-day low of 1313.33.  The SPX closed near its low. 
Technical indicators are neutral.  The index’s reversal in June’s second half returned markets to an uptrend on June 21st that was confirmed on June 30th.  However, the market’s weakness since Friday, July 8th has placed the nascent uptrend under pressure.  The SPX closed above 1300 for the ninth straight session.  The index closed above its April 2010 highs for the 152nd straight session.  The SPX closed (by +0.83%) above its 20-day moving average (1302.86) for the 10th straight session.  The index closed (by -0.14%) below its 50-day moving average for first time in eight sessions.  The index closed (by -0.23%) below its 100-day moving average (1316.65) for the first time in eight sessions.  The SPX closed +3.10% above its 200-day moving average.  The 50-day and 100-day moving averages declined.  The directional momentum indicator is positive for the ninth straight session, and the trend is moderate and declining.  Relative strength fell to 50.56 from 52.63, a neutral range.  Next resistance is at 1322.76; next support is at 1308.92.
BKX.  On lower volume, the KBW bank index fell -0.11 points, or -0.23%, to 46.86.  Volume fell -0.51% to 67.97 million shares, down from 68.32 million shares Monday and below the 79.27 million share 50-day average.  The BKX closed +9.036% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -19.14% and -15.76% below its April 23, 2010, and February 14, 2011 closing highs, respectively. 
Financials outperformed the market, and large-cap banks’ losses underperformed regionals’ gains.  The BKX opened marginally below its previous 47.96 close to the 46.85 level, but momentum was significantly positive.  By 10:10, the index climbed +0.60 points, or +1.32%, to the 47.45 level.  Through 11:00, gains retraced to the 47.20 level.  A rally returned the index to 47.42 by 12:30, but by 2:00, gains had again retraced to 47.20.  The 2:00 release of the Fed’s meeting minutes sent the BKX to its intra-day high of 47.53 at 2:20.  Through the close, momentum turned negative on Moody’s downgrade of Ireland’s bonds to junk status and the New York Attorney General’s inquiry into Bank of America’s settlement with private mortgage security investors.  The index fell -1.50% from its intra-day high to the intra-day low of 46.82 at 3:50.  The index closed near its low for the day.
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