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U.S. Futures Rally on Improved Chinese, German PMI, Jackson Hole Hopes

|Includes: BAC, CBSH, COLB, City National Corporation (CYN), GA, HCBK, NTRS, ONB, PNFP, PRK, SIVB, STI
This morning.  U.S. equity markets remain in correction.  Asian equity markets closed higher on a better-than-expect Chinese PMI report.  Anticipated Fed announcements are also lifting equity markets.  Eurozone equities are also higher, but below early morning intraday highs.  Treasuries are weaker.  U.S. equity futures are again strong, but not quite as strong as yesterday, when equities hit their intraday highs at the open to lose most gains by the close.  Overall trading patterns remain bearish.  3-month LIBO continues to drift higher.  Euribor-OIS spreads indicate increasing Eurozone interbank risk premiums, while the US LOIS spreads remain low.  The U.S. dollar is lower.  Commodities markets are mixed.  Equity options markets suggest a bearish short-term outlook.  After a fair value adjustment of -1.43 points, September SPX equity futures are at 1137.00, up +15.13 points.  The SPX opens at 1123.82, -17.6% below its recent April 29 multi-year closing high, and -7.02% and -11.4% below its respective 20- and 50-day moving averages.  The SPX is -10.6% below its 1257.64 year-end close.  Next resistance is at 1139.18.  Next support is at 1114.78.
Monday.  U.S. equity markets closed higher, but disappointingly so.  Futures were particularly strong, but momentum faded quickly after the open.  The intraday high was set in the first minutes of the trade, and indexes moved back to breakeven at mid-day.  An second afternoon rally also faded through the final two hours, and markets tested their intraday lows again at the close.  The DJI rose +0.34%, followed by +0.15% gains by the Nasdaq, and NYSE composite, and a meager +0.03% gain by the SPX.  Market segments were mixed, led by telecommunications, technology, and industrials.   Basic materials, oil and gas, and financials were the laggards and closed lower.  Financials lost -1.16%.  Intraday put/call ratios below +0.50 at the open, but crept higher to end at 0.73.  Volatility fell.  The VIX gapped higher, but trended lower as equity markets rose in early trading, then trended higher through most of the rest of the session.  The VIX opened below 30.0, but ended at 42.44, down -1.42% from 43.05 at the prior close.
The distribution day count is unchanged.  The count numbers 9 on the NYSE composite, 8 on the SPX and Nasdaq, and the DJI.  The BKX count is 11.  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 also in correction.  Markets closed moderately higher on mixed volume.  Commentary focused on the likelihood that the U.S. Federal Reserve will announce further measure to stimulate the economy.  Also, in China, a report showed that the contraction in manufacturing activity had eased.
In Japan, the Nikkei closed at 8733.01, up +1.22% on an impressive +8.90% increase in volume.  The index gapped higher at the open, retreated to breakeven at mid-day, and rallied strongly through the afternoon to an intraday high of 8747.41 minutes before the close.  Most market segments closed higher.  Technology, consumer goods, and industrials were the leaders, gaining at least +1.47%.  Financials rose +1.02%.  Laggards were basic materials, consumer services, and telecommunications, which lost -0.90%.  lower.  The NKY closed below all moving averages and -14.6% below its 2010 close.
In China, the Hang Seng and Shanghai composite closed up +1.99% and +1.52%, respectively.  In Hong Kong, volume fell -23.1%.  Most market segments closed higher, led by basic materials, technology, and oil and gas, which rose at least +3.31%.  Financials rose +1.91%.  Laggards were consumer services, telecommunications, and consumer goods, with the latter down -0.13%.  After about an hour’s hesitation, the HSI rose steadily through the day to end at 19875.53, just short of the 19893.4 intraday high.  The HSI closed -2.14% below its 2010 close.  In Shanghai, the SHCOMP opened higher, but traded back to breakeven in the first hour before rallying through the day’s remainder to closed at 2554.02, essentially the intraday high.  Volume rose +0.17%.  All market segments closed at least +1.14% higher, led by telecommunications, industrials, and technology, with rose at least +1.70%.  Financials closed up +1.54%.  Laggards were consumer services, health care, and consumer goods.  The SHCOMP ended -16.5% below its recent April 18th 3057.33 high, -9.05% below its 2010 close, and -5.37% below its 2698.83 50-day moving average.
In Europe, equity markets are also higher, but off the day’s best levels.  Strength is attributed to prospective Fed action announcements this Friday, and better-than-expected August PMI reports.  The Eurostoxx50, DAX, and FTSE are up +1.56%, +1.19%, and +1.55%, respectively.  All market segments are at least +0.94% higher, led by technology, consumer services, and telecommunications.  Utilities, consumer goods, and financials are the laggards.  The EuroStoxx50 traded is trading at 2217.36, compared to a 2239.91 intraday high.
Libor, LOIS, Currencies, Treasuries, Commodities:
·         Interbank lending rates are showing increased stress, as concerns heighten regarding the health of Eurozone banks in a stressed economic environment.  Overnight USD LIBOR rose to 0.14444%, compared to 0.14333% the prior day, but down from 0.25188% at year-end.  USD 3-month LIBOR rose to 0.31178%, compared to 0.30844% the prior day, and approaching the 0.30950% year-end rate.
·         The US Libor-OIS (LOIS) spread is 22.7 bps, compared to 22.3 bps the prior day and 12.0 bps at the end of 2010.  Euribor-OIS rose to 65.9 bps, compared to 67.0 bps the prior day, and 40.6 bps at the end of 2010.  A rise in the LOIS indicates an increased intra-bank lending risk premium.
·         The U.S. government overnight repo rate is 5 bps, unchanged from 5 bps the prior day, and well off from a recent high of 33 bps on August 2nd.
·         The U.S. dollar is weaker against the euro, pound, and yen.  The dollar trades at US$73.689, compared to US$74.074 the prior day, and below its US$74.681 50-day, US$74.659 100-day, and US$76.521 200-day moving averages.  The euro trades at US$1.4474, compared to US$1.4358 Monday and US$1.4397 the prior day.  The euro trades above its US$1.4304 50-day and US$1.4366 100-day moving averages.  In Japan, the dollar trades at ¥76.59, compared to ¥76.79 Monday and ¥76.55 the prior day.  The yen trades better than its 50-day moving average ¥78.839.
·         U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.209% and 2.148%, respectively, compared to 0.201% and 2.106% Monday.  The yield curve widened to +1.939%, from +1.905% the prior day.  In the past year, the 2- and 10-year spread has varied from a low of +1.872% on August 18, 2011, and a high of +2.889% on February 3, 2011. 
·         Commodities prices are mixed, with mixed petroleum, lower precious metals, aluminum, and copper, and higher agriculture prices.
U.S. news and economic reporting.  Economic reporting is limited to the July new home sales and the August Richmond Fed manufacturing index, both at 10:00.
Overseas news: In August, the Eurozone purchasing managers composite index held at 51.1, the same level as July and above expectations for a decline to 50.0.  In August, Germany’s purchasing managers manufacturing and services indexes came in at 52.0 and 50.4, with the manufacturing index beating estimates for a decline to 50.6 and the services index missing expectations for a decline to only 52.0.  In August, Germany’s ZEW Institute’s economic survey showed deterioration in the current and future economic sentiment, with the indicators falling to 53.5 and -37.6, compared to the prior levels of 90.6 and -15.1 and expectations of 85.0 and -26.0.  In August, China’s preliminary purchasing managers manufacturing index rose to 49.8 from the prior 49.3 level.  Today, China’s central bank advisor said the country should diversify its foreign reserves to hedge risks for a long-term US dollar decline. 
Company news/research:
·         CYN – upgraded to buy at Evercore, price target of $58
2Q2011 Earnings.  The second quarter’s earnings results exceeded revenue and earnings expectations.  Of the 460 S&P500 companies that reported earnings to date, 76% (349 out of 460) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +5.0% (versus a historical average of +2%).  EPS is up +16.6% over the prior year.  Though challenged in the current operating environment, 84% of companies reported increased revenues over the prior year and 71% 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, 88% (21 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 11.3x estimated 2011 earnings (increased to $99.78 from $99.05) and 10.0x estimated 2012 earnings ($112.67), compared to 11.5x and 10.1x 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 +5.5%, and +5.0%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.7% and +32.9%, respectively.
Large-cap banks trade at a median 1.04x tangible book value, and 9.6x and 7.7x 2011 and 2012 consensus earnings, respectively, compared to 1.10x tangible book value and 10.4x/7.9x 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 +35.6% and +66.9%, respectively.
Options.  Options markets are neutral.  Composite options markets are neutral, equity options markets are neutral, and index options markets are neutral.  The composite put/call ratio closed at 1.08, below its 5- and 10-period moving averages of 1.26 and 1.20, respectively.  The index put/call ratio closed at 1.48, below the 5- and 10-period moving averages of 1.55 and 1.52, respectively.  The equity put/call ratio closed the day at 0.73, below its 5- and 10-period moving averages of 0.85 and 0.80, respectively.
Monday’s equity markets. On lighter volume, equity markets posted small and disappointing gains. The DJI and SPX closed up +0.34% and +0.03%. The NYSE and Nasdaq were both up +0.15%.  Futures were higher based on rebel advances in Libya and the possible early resumption of petroleum exports.  Oil fell, and the early morning futures indicated a strong open of some +20 SPX points.  In the event, these were the high prints for the day, as markets gave back gains throughout the morning.  By mid-day, markets were mixed, but rallied somewhat in the early afternoon in a quieter trade.  In the last half hour, markets turned downward after it a report that GS CEO Lloyd Blankfein had hired a defense attorney.  GS fell -5.25 points in the last 15 minutes of trading as investors dumped the stock. Investors are keeping an expectant eye on Federal Reserve Chairman Ben Bernanke’s speech in Jackson Hole on August 26th, hoping for some new economic stimulus plan from the Fed.
Trading desks were better to buy Monday.  Trading desks report that for the last couple of sessions, long-only funds have been putting capital to work, buying what they see as an oversold market.  Shorts are present, but not pressing the market downward, but rather looking for short-term situations given the volatility.  The Bloomberg NYSE new net highs were -234 versus the previous day’s reading of -279. The relative strength indicator rose to 34.14 from the previous reading of 33.79 and remains in the oversold range.
Market segments were mixed.  Telecommunications, technology, and industrials were the leaders, while basic materials, oil and gas, and financials were the laggards.
Financials underperformed the broad market.  The XLF and BKX closed down -1.24% and -1.10%, respectively.  The KRX gained +0.38%. BAC, GS and HIG were the worst performing names among the broader financials, down -7.89%, -4.70%, and -3.84% respectively.  BAC was lower on a research report that indicated that they may need to raise $40-$50 billion dollars in additional equity.  GS was lower after a report that the CEO had retained a prominent defense attorney.  The BKX finished the day with 8 names higher and 16 lower. Leaders included STI, NTRS, and CBSH, while the laggards were C, JPM, and BAC. The KRX finished the day with 27 names higher, 22 lower and 1 unchanged. Leaders included COLB, SIVB, and ONB, while the laggards were HCBK, PNFP, and PRK. The BKX, KRX, and XLF all finished below their 50-, 100-, and 200-day and 200-week moving averages. While the broader indexes have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -39.43% below its April 2010 high and -57.48% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume fell -21.0% to 1.192 billion shares, from 1.509 billion shares Friday, 1.03x the 1.145 billion share 50-day moving average.  Market breadth was negative, and up volume lagged down volume.  Advancing stocks lagged decliners by -356, compared to –1573 the prior day), or 0.79:1.  Up volume led down volume by 0.89:1.
SPX. On lower volume, the SPX gained +0.29 points, or +0.03%, to end at 1123.82.  Volume fell -28.9% to 900.14 million shares, down from 1.27 billion shares Friday but above the 896.67 million share 50-day moving average.  For the 6th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1268.60 vs. 1284.76 respectively)The SPX closed below its 200-week moving average (1151.95).
The SPX gapped higher at the open to the 1140 level and, at 9:36, set the intra-day high of 1145.49.  Momentum reversed, and through 10:10, the index retraced to 1135.  A small rally to the 1140 level by 10:30 was sold, and through 11:55, the index retraced the day’s entire gains and turned negative.  Bouncing off the 1122 level, the index climbed back to 1135 through 1:10.  Unable to move higher, equities again lost momentum and fell into the close.  At 3:52, the index set the intra-day low of 1121.09 and finished just above this level. 
Technical indicators are negative.  Markets have been in correction since July 27thThe SPX closed below 1300 for the 17th straight session and below 1200 for the 11th time in 12 sessions.  The index closed below its April 2010 highs for the 12th straight session.  The 50-day moving average has been below the 100-day moving average since July 11thThe SPX closed (by -7.02%) below its 20-day moving average (1208.70) for the 19th straight session.  The index closed (by -11.4%) below its 50-day moving average for the 19th straight session.  The index closed (by -13.4%) below its 100-day moving average (1298.29) for the 18th straight session.  The SPX closed -12.5% below its 200-day moving average, closing below that average for the 14th straight session.  All moving averages fell.  The directional momentum indicator is negative for the 18th straight session, and the trend is very strong and increasing.  Relative strength rose to 33.44 from 33.37, the low end of a neutral range.  Next resistance is at 1139.18; next support is at 1114.78.
BKX.  On lower volume, the KBW bank index fell -0.39 points, or -1.10%, to end at 35.10, its 13th close below the prior 52-week low of 42.70 from August 25, 2010, its 11th straight sub-40 close, and the lowest close since July 19, 2009.  Volume fell -18.7% to 128.07, down from 157.60 million shares Friday but above the 100.50 million share 50-day average.  The BKX closed -18.3% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -39.4% and -36.9% below its April 23, 2010, and February 14, 2011 respective closes.
Financials were the market’s worst performance sector, and large-cap banks’ losses underperformed regional banks’ gains.  The BKX mirrored the broader market, but at a lower starting level.  The index gapped higher at the open to the 36.10 level, up +1.80%, and at 9:33, reached the intra-day high of 36.38.  Through 11:55, the index fell, turning negative at 11:35 and reaching 35.18 by 11:55.  Financials rebounded with the broader market through 1:10, and the index retook the break-even line at 12:50 and reached the 35.70 level.  Momentum reversed, and the BKX fell into the close and turned negative for the day at 2:15.  At 3:53, the index set the intra-day low of 35.04 and closed marginally above that level.
Technical indicators are negativeBank stocks significantly underperformed the broader market during the May-June correction.  Foreign and domestic sovereign debt fears returned markets to a correction on July 27th and banks have reassumed their loss leadership.  Since the BKX 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, the gaps are widening, and all major averages are falling.  The 50-day average (44.77) crossed below the 100- and 200-day moving averages (47.53 and 49.51, respectively) on April 25th and June 16th.  The 20-day closed (by -3.89 points) below the 50-day for the 112th straight day, and the gap expanded.  The 50-day moving average closed (by -4.73 points) below the 200-day moving average for the 49th straight session, and the gap expanded.  The 100-day moving average closed (by -1.98 points) below the 200-day moving average for the 26th straight session, and the gap expanded.  The index closed below the 20-day moving average for the 29th time in 30 sessions.  The index closed below its 50-, 100-, and 200-day moving average for the 31st, 91st, and 57th consecutive sessions, respectively.  The index closed below the 50.00 level for the 57th straight session and below 40 for the 11th straight session.  The directional movement indicator is negative for the 20th straight session, and the trend is the strongest since July 16, 2008 and still increasing.  Relative strength fell to 29.95 from 30.68, an oversold range.  Next resistance is 35.97; next support at 34.63.