U.S. Equities Again in Correction, But Futures Improve After Better Weekly Jobless Report

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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.  Pressured by 3 consecutive days’ distributions, U.S. equity markets are again in correction. Despite diminished prospects for quick approval of increased U.S. debt capacity, bond market reaction remains muted, even as volatility has risen substantially in world equities markets. In Asia, equity markets closed mixed, on mixed volume.  For a 3rd day, European equity indexes are moderately lower.  U.S. equity futures are modestly higher, helped by a better-than-expected initial jobs claims number for the latest week. Generally, corporate earnings continue to surprise positively.  U.S. Treasury prices are slightly higher.  The U.S. dollar is slightly stronger. Commodities markets are mixed.  Equity options markets suggest increased market pessimism.  After a fair value adjustment of +2.04 points, September SPX equity futures are at 1304.60, up +3.66 points.  The SPX opens at 1304.89,  -4.31% below its recent April 29 multi-year closing high, and +1.66% and -0.44% below its respective 20- and 50-day moving averages.  The SPX is +3.76% above its 1257.64 year-end close.  Next resistance is at 1303.49.  Next support is at 1294.95.
Wednesday, U.S. equity markets closed significantly lower on increased volume. The Nasdaq, NYSE composite, SPX, and DJI lost -2.65%, -2.14%, -2.03%, and -1.59%, respectively.  Futures indicated a loss of moderately lower open, and the SPX gapped about -5.0 points at the open, but mixed earnings news and the absence of U.S. debt ceiling news spurred selling that quickly took the SPX down to 1315. Macro factors dominated through the session, and indexes sold off through the day, with the DJI and SPX briefly trading below 12300 and 1300, respectively, late in the session. NYSE volume rose +31.3%, 1.15x the 954.31 million share 50-day moving average volume.  All major market segments closed lower. Utilities, telecommunications, and consumer goods outperformed. Basic materials, industrials, and technology were the worst performers with losses of at least -2.37%. Financials lost -2.33%.  Volatility rose +13.6% to end at 22.98, compared to 20.23 at the prior day’s close.
Recent distribution days number 9 on the NYSE composite and 7 on the SPX and DJI, and 5 on the Nasdaq. The BKX count rose to 10.  Distribution days signal institutional selling in the prior 25 trading days, or since the commencement of the most recent uptrend.
In Asia, Japanese and Chinese equity markets are under pressure.  Market commentary remains focused on the resolution of U.S. debt authorization and dollar weakness, which is expected to impact exports, reducing growth.  Chinese banks fell after regulators banned commercial lenders from rolling over or renewing loans to local government financing vehicles. In Japan, the Nikkei closed down -1.45%, on a +5.65% increase in volume.  All market segments closed lower.  Utilities, health care, and industrials led.  Consumer services, oil and gas, and technology were the laggards.  Financials lost -1.60%.  For the 1st hour, the NKY traded just below the prior day’s close, but lost ground through early afternoon, trading to an intraday low 9853.85 before rallying through the session’s final two hours. The NKY closed at 9901.35, its first close below 10000.00 since July 19. The NKY closed below its 20-, 100-, and 200-day moving averages, but above its 50-day moving average.  It closed +5.88% above its June 17th correction low, but -3.20% below its 2010 close. 
In China, the Hang Seng closed up +0.13%, but the Shanghai composite fell -0.54%.  In Hong Kong, volume rose +0.68%.  As in Japan, indexes gapped significantly lower, but rallied through late afternoon and reversed to post a modest gain. The HIS closed at 22570.74, just off its intraday high and +1.53% above its 22231.1 intraday low.  Market segments closed mixed, with the best performance from utilities, industrials, and basic materials, while consumer services, technology, and consumer goods were down at least -0.38%.  The Hang Seng is +4.50% above its June 20th correction low.  In Shanghai, equities gapped lower and traded to a mid-morning intraday low of 2684.66. The index generally rallied through the day’s remainder and closed just below its 2712.09 intraday high. The SHCOMP closed at 2708.78, +3.34% above its June 20th correction low.  Volume fell -2.36%.  Most market segments closed lower. Leaders were basic materials, oil and gas, and health care. Utilities, industrials, and financials were the laggards.  Financials closed down -1.19%.  The SHCOMP ended -11.4% below its recent April 18th 3057.33 high, -3.54% below its 2010 close, and -1.49% below its 2749.74 50-day moving average.
In Europe, equity markets are moderately lower, with commentary focused on mixed earnings reports.  The EuroStoxx50, FTSE, and DAX are down -0.97%, -0.61%, and -1.58%, respectively.  Equity markets gapped lower, but rallied immediately before resuming their downward trend to an intraday low at 11:00. At mid-day, equities had rallied weakly. The Eurostoxx50 is at 2664.31, compared to its 2652.12 intraday low.  Market segments are mostly lower, with health care up +0.61%. Financials and utilities are the other leaders, though down -0.26% and -0.44%, respectively. Consumer goods, industrials, and basic materials are the worst performers.  The Eurostoxx50 is +1.63% above its recent July 18th correction low, but is off -4.62% in 2011.
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 rose to 0.12375%, from 0.12225% the prior day, but down from 0.25188% at year-end.  USD 3-month LIBOR rose to +0.25395%, compared to 0.25285% the prior day, but down from 0.30950% at year-end.  The US Libor-OIS spread is 12.0 bps, compared to 11.8 bps the prior day and 18.3 bps at the end of 2010. The U.S. dollar is slightly stronger against the euro and pound, but is weaker against the yen.  The dollar trades at US$74.287, below its US$74.85 50-day, US$74.97 100-day, and US$76.80 200-day moving averages.  The euro trades at US$1.4285, compared to US$1.4369 Wednesday and US$1.4511 the prior day.  The euro trades above its US$1.4322 50-day and US$1.4329 100-day moving averages.  The dollar trades at ¥77.72, compared to ¥77.98 Wednesday and ¥77.88 the prior day.  The yen trades better than its 50-day moving average ¥80.21.  U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.438% and 2.977%, respectively, compared to 0.442% and 2.980% Wednesday.  The yield curve widened to +2.539%, from +2.538% 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 energy, higher precious metals, lower aluminum and copper, and mixed agriculture.
U.S. news and economic reporting.  Economic reports focus on employment trends with the release of initial and continuing jobless claims for the latest week. Initial claims were 398K, compared to 415K survey and 418K the prior week. This was the 1st sub-400K report since the week of April 1. Also, June pending home sales are released at 10:00.
Overseas news: Today, Italy auctioned €7.97 billion of 3- and 10-year debt, at the higher end of the targeted range but with an +80 basis point yield increase over the prior auctions.  Today, Spain’s federal government won an agreement with its regional and local governments to implement spending controls.  In July, U.K. consumer confidence fell for the second straight month.  Today, China’s foreign exchange administration reiterated plans to diversify its currency reserve holdings. 
Company news/research:
·         SNV – reports GAAP and operating EPS of -$0.07, compared to estimates of -$0.06
2Q2011 Earnings.  The second quarter’s earnings results have so far exceeded revenue and earnings expectations.  Of the 241 S&P500 companies that reported earnings to date, 78% (187 out of 241) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +7.1% (versus a historical average of +2%).  EPS is up +18.0% over the prior year.  Though challenged in the current operating environment, 84% of companies reported increased revenues over the prior year and 72% 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.  
With all 24 BKX members reporting earnings, 83% (20 of 24) beat earnings estimates on an operating basis.  Revenues also exceeded expectations, with 79% of BKX members beating estimates.  For the second quarter of 2011, the BKX earned $1.12 per share, beating $0.97 estimates and compared to $0.96 and $0.61 per share in 1Q11 and 2Q10 (a +17% and +84% increase, respectively)
Valuation.  The SPX trades at 13.1x estimated 2011 earnings ($99.50) and 11.5x estimated 2012 earnings (increased to $113.53 from $112.91), compared to 13.4x 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 +5.2%, and +5.8%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.4% and +33.9%, respectively.
Large-cap banks trade at a median 1.27x tangible book value, and 12.7x and 10.3x 2011 and 2012 consensus earnings, respectively, compared to 1.29x tangible book value and 12.9x/10.6x 2011/2012 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 +32.2% and +68.9%, respectively.
Wednesday’s equity markets. On heavier volume, equity markets closed significantly lower.  The Nasdaq, NYSE, SPX and DJI closed down -2.65%, -2.14%, -2.03%, and -1.59%.  Uncertainty pertaining to the resolution to the U.S. debt ceiling, weaker economic data, and mixed  corporate earnings and guidance all contributed to the sell-off.  The markets gapped lower and progressed lower through the day. The release of the Beige book at 2:00 accelerated the decline slightly after stating that since the beginning of June, the economy grew at a slower pace in most regions, as shoppers spent less and factory production eased.  Markets finished the day just off the intraday low as investors attempted a rally in the last hour.
Trading desks report that investors were slightly more active Wednesday, with a small bias to the sell side.  Most are watching the Congressional debate and assessing the effects on short- and medium-term economic prospects. Traders report that over the last few sessions, investors have become much more cautious and have begun to de-risk to some extent in names that are primarily keyed to the economy.  There wasn’t panicked or capitulation selling, and the larger trades seemed to be driven by faster accounts.  Long only accounts seem to be trimming small amounts in economically sensitive sectors.  One technical analyst noted the bearish break through 1331 and finds support level at 1306-1307 (July 19 bull gap) and then 1296, which would be equal to the July 18th lows.  The AAII U.S. Investor Sentiment Bullish reading of 37.84 (July 28th ) fell compared to the previous week’s reading of 39.86.  The Investment Company Institute (OTC:ICI) reported the largest outflows since mid-June, with domestic outflows of $6.529mm. This represents the 9th weekly outflow from domestic equity funds. The relative strength indicator fell to 44.21 from the previous day’s reading of 53.64. The VIX rose to 22.98, up +13.6%.
All market segments were negative.  Utilities, telecommunications, and consumer goods lost the least, while basic materials, industrials and technology lagged all other sectors.
Financial stocks were broadly lower. The XLF, BKX, and KRX were all lower, off -2.37%, -2.34%, and -2.00%, respectively. Among the broader financials TROW (-6.78%), MCO (-5.26%), and GNW (-5.24%) lost the most. Among the SPX financial names, only 1 name, ACE, was higher with 83 names lower. The BKX was lower, like the market, from the open. The selling accelerated shortly after the release of the Beige book with the BKX closing just off its lows. The financials are very tightly tied to success in the economy and some de-risking does seem apparent. We have heard from desks over the past few sessions of some short-selling which had been noticeably absent previously. The BKX finished with all 24 names lower. FNFG, HBAN, and PBCT were the best performing names, while STI, C and RF lost the most. The KRX finished with 2 names higher and 48 names lower. BPFH, and CBU were higher, while PVTB, IBKC, and FMER led the laggards. The BKX, KRX, and XLF all finished below their 50-, 100-, and 200-day moving averages. While the broader indexes have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -20.12% below its April 2010 high and -43.93% below its best level of 82.55 in September 2008.
Options markets.  Options markets remain mixed.  Equity options markets are slightly bullish, whereas index options markets are slightly bearish.   The composite put/call ratio closed at 1.12 on Wednesday, a sharp increase from Tuesday’s 0.80 closing value.  The composite put/call ratio is above both its 5- and 10-period moving averages of 0.89 and 0.90, respectively.  The index put/call ratio closed at 1.53 on Wednesday, rising substantially from Tuesday’s 1.11 closing value.  The 5- and 10-period moving averages of the index put/call ratio are 1.21 and 1.19, respectively.  The equity put/call ratio closed the day at 0.67, below its 5- and 10-period moving averages of 0.60 and 0.64, respectively.
NYSE Indicators.  Volume rose +31.3% to 110 billion shares, from 802 million shares Tuesday, 1.15x the 954.31 million share 50-day moving average.  By large margins, market breadth was negative, and up volume lagged down volume.  Advancing stocks lagged decliners by -2561, compared to -974 the prior day, or 0.09:1.  Up volume trailed down volume by 0.06:1.
HTC Dividends:
·         In July, we expect to accrue dividends of $81.2 thousand.
 SPX.  On higher volume, the SPX fell -27.05 points, or -2.03%, to 1304.89.  Volume rose +30.16% to 849.22 million shares, up from 652.44 million shares Tuesday and above the 730.87 million share 50-day moving average.  For the 192nd consecutive day, the SPX’s 50-day moving average closed above its 200-day moving average (1310.67 vs. 1283.62, respectively).  The SPX closed above its 200-week moving average (1159.66).
The SPX opened flat to the prior day’s close at 1331.91 and immediately set the intra-day high.  Momentum was decisively negative.  Through 10:30, the index fell consistently and reached the 1312 level.  A small rebound returned the index to 1320 by 11:30.  Momentum reversed and markets drifted lower through the close.  At 2:30, the index broke down through 1310 and by 3:25, the index breached 1305 and set the intra-day low of 1303.49 10 minutes before the close.  The index finished just above its intra-day low.
Technical indicators are neutral.  Recent sovereign debt issues, foreign and domestic, returned markets to a correction on July 27thThe SPX closed above 1300 for the 20th straight session.  The index closed above its April 2010 highs for the 163rd straight session.  The 50-day moving average has been below the 100-day moving average since July 11thThe SPX closed (by -1.66%) below its 20-day moving average (1326.94) for the first time in seven sessions.  The index closed (by -0.44%) below its 50-day moving average for the first time in seven sessions.  The index closed (by -0.92%) below its 100-day moving average (1317.02) for the first time in seven sessions.  The SPX closed +1.66% above its 200-day moving average.  The 20-, 50-, and 100-day moving averages fell.  The directional momentum indicator switched to negative for the first time in seven sessions, and the trend is weak and declining.  Relative strength fell to 44.82 from 54.68, a neutral range.  Next resistance is at 1323.37; next support is at 1294.95.
BKX.  On higher volume, the KBW bank index fell -1.11 points, or -2.34%, to 46.29.  Volume rose +38.21% to 88.80 million shares, up from 64.25 million shares Tuesday and above the 78.30 million share 50-day average.  The BKX closed +7.70% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -20.12% and -16.79% below its April 23, 2010, and February 14, 2011 closing highs, respectively.
Financials underperformed the market, and large-cap banks underperformedregionals.  The BKX gapped lower at the open to 47.21l, immediately setting the intra-day high.  Traded tracked the broader market.  By 9:35, the index crossed below 47.00 and through 10:10, financials declined to the 46.70 level.  A rally from 10:30 through 11:35 reclaimed the 47.00 level, but the rally was quickly sold.  Financials declined through the close, and set the intra-day low of 46.24 at 3:50.  The index finished slightly above the low. 
Technical indicators are negativeBank stocks significantly underperformed the broader market during the May-June correction.  Recent outperformance during the market’s July rebound was short lived, as foreign and domestic sovereign debt fears returned markets to a correction on July 27th.  Since the BKX’s crossed below its 50-day moving average on February 23rd, the 50-day average has provided meaningful resistance to any positive momentum.  Moving averages align bearishly.  The shortest duration averages are below the longer duration averages, and the gaps are widening.  The 50-day average (47.78) crossed below the 100- and 200-day moving averages (49.64 and 50.03, respectively) on April 25th and June 16th.  The 20-day closed (by -0.30 points) below the 50-day for the 94th straight day, but the gap narrowed.  The 50-day moving average closed (by -2.26 points) below the 200-day moving average for the 30th straight session, and the gap widened.  The 100-day moving average closed (by -0.40 points) below the 200-day moving average for the eighth straight session, and the gap widened.  The index closed below the 20-day moving average for the 11th time in 13 sessions.  The index closed below its 50-day moving average for the 14th straight session.  The index closed below the 100- and 200-day moving averages for the 74th and 40th consecutive sessions, respectively.  The index closed below the 50.00 level for the 39th straight session.   The directional movement indicator is negative for the third straight session.  Relative strength fell to 42.17 from 49.44, the lower end of a neutral rangeNext resistance is 46.98; next support at 45.92.

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