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U.S. Futures Extend Gains, German Cabinet Approves EFSF Expansion

This morning.  U.S. equity markets are in a confirmed uptrend. U.S. equity futures are moderately higher, benefiting from strength in European markets, where the German cabinet has approved measures to strengthen the emergency stabilization fund.  Asian equity market closed mixed.  Led by financials, European equities are higher with continued strong U.K. performance and a rebound in the DAX. U.S. Treasury prices are higher. Overall trading patterns suggest an improving outlook.  LIBO markets suggest heightened interbank lending credit concerns. Euribor-OIS spreads are trending higher, but are little changed today.  The U.S. dollar is lower.  Commodities markets are mixed.  Equity options markets suggest a neutral short-term outlook.  After a fair value adjustment of +6.82 points, September SPX equity futures are at 1217.20, up 5.58 points.  The SPX opens at 1212.92, -11.1% below its recent April 29 multi-year closing high, and +3.22% above its 20-day moving average and -3.56% below its 50-day moving average.  The SPX is -3.56% below its 1257.64 year-end close.  Next resistance is at 1223.42.  Next support is at 1199.09.

On increased volume, U.S. equities staged an positive reversal, erasing early losses and extending recent days’ gains. At the open, equities gapped modestly lower in response to disappointing June Case-Shiller home prices, but were struck lower still after the 10:00 release of August consumer confidence, at 44.5 far worse than survey and the worst since April 2009. The SPX quickly found support at 1196, and rallied to 1214 by 11:30, above the 1210.08 previous close. After some mid-day profit taking, markets marked time until the 2:00 release of August FOMC minutes, which implied an inclination toward more quantitative easing. Markets rallied, but gave up most of these late gains into the close. The Nasdaq led the other major indexes, adding +0.55%, followed by the SPX, NYSE composite, and DJI, which added +0.23%, +0.18%, and +0.18%, respectively.  Most market segments closed higher, led by telecommunications, basic materials, and industrials, which closed at least +0.85% higher. Technology, utilities, and financials were the laggards, with financials off -0.65% at the close. Intraday put/call ratios traded opened at 0.65 and closed at 0.71.  Volatility rose.  The VIX opened at 32.97, moved down to an intraday low of 31.55 shortly before the close, and ended at 32.89, up +1.89%.
Last Tuesday’s confirmation of an equity uptrend reset the distribution day count.  Based on Thursday’s losses, the distribution day count is 1 on the DJI and NYSE composite.  Volume fell on the BKX, so the day’s -0.95% loss does not qualify as a distribution. Distribution days signal institutional selling in the prior 25 trading days, or since the commencement of the most recent uptrend.  An accumulation of distribution days signal a weakening of an uptrend and increased probability that an uptrend will come under pressure or that a correction will ensue.
In Asia, Japanese and Chinese equity markets closed higher, with Hong Kong providing the best result. Traders attributed the strength to anticipation that the Federal Reserve will provide additional economic stimulus. Volume was unchanged in Japan and lower in China.  In China, equities slipped after the Bank of China broadened the bank reserve base by adding customer margin deposits.
In Japan, the Nikkei gapped higher and reached its 8992.86 intraday high in the first hour.  Subsequent trading took the index sideways through mid-day, and the afternoon trade trended slightly lower.  The index closed at 8953.90, up 1.16%.  Volume fell -5.56%.  The NKY gapped lower and traded sideways through mid-day. The index rebounded in early afternoon, trading at breakeven through most of the afternoon. A late sell-off was followed by a last minutes rally that carried the index back to a small gain. Market segments closed mixed, with consumer services, oil and gas, and health care were the leaders, up at least +0.49%. Financials lost -0.03%. Technology, industrials, and telecommunications were the laggards, shedding at least -0.39%. The NKY closed below all moving averages and -12.5% below its 2010 close.
In China, the Hang Seng and Shanghai composite closed up +1.64% and +0.75%, respectively.  HSI volume fell -47.7%%, while SHCOMP volume fell -22.0%.  In Hong Kong, the HSI opened without much conviction, but began a day long rally that accelerated into the close. The HSI closed at 20534.85, just short of its 20556.9 intraday high, which was set moments before the close. All market segments closed higher, led by consumer services, oil and gas, and consumer goods, which gained at least +2.66%.  Financials were middling performers, gaining +1.70%. Industrials, telecommunications, and utilities were the laggards, but gained at least +0.26%. The HSI closed -10.9% below its 2010 close.  In Shanghai, the SHCOMP also opened without much conviction, and trended lower through the morning to an intraday low of 2545.10 before rallying through most of the afternoon. Market segments were mixed, with financials, basic materials, and consumer goods the leaders (financials rose +0.46%). Oil and gas, telecommunications, and technology were the laggards, closing down at least -0.32%. The SHCOMP ended -16.0% below its April 18th 3057.33 high, -8.57% below its 2010 close, and -4.49% below its 2687.93 50-day moving average.
In Europe, equity markets are posting strong gains and presently trade at the intraday high. The Eurostoxx50, FTSE, and DAX are +1.75%, +1.04%, and +1.53%,  respectively.  Financials, technology, and basic materials are the segment leaders, up at least +1.93%. Utilities, health care, and consumer goods are lagging, but up at least +1.15%. 
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 0.14667%, from 0.14333% Tuesday, but down from 0.25188% at year-end.  USD 3-month LIBOR rose to 0.32722%, compared to 0.32556% Tuesday, and above the 0.30950% year-end rate.
·         The US Libor-OIS (LOIS) spread is 24.1 bps, compared to 23.8 bps the prior day and 12.0 bps at the end of 2010.  Euribor-OIS is 64.3 bps, down from 64.5 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$73.904, compared to US$73.946 the prior day, and below its US$74.545 50-day, US$74.587 100-day, and US$76.368 200-day moving averages.  The euro trades at US$1.4456, compared to US$1.4441 Tuesday and US$1.4511 the prior day.  The euro trades above its US$1.4322 50-day and US$1.4368 100-day moving averages.  In Japan, the dollar trades at ¥76.56, compared to ¥76.74 Tuesday and ¥76.83 the prior day.  The yen trades better than its 50-day moving average ¥78.417.
·         U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.192% and 2.168%, respectively, compared to 0.195% and 2.177% Tuesday.  The yield curve narrowed to +1.976%, from +1.982% the prior day.  In the past year, the 2- and 10-year spread has varied from a low of +1.872% on August 19, 2011, and a high of +2.910% on February 4, 2011.
·         Commodities prices are mixed, with lower petroleum, lower precious metals, but higher aluminum and copper, and lower agriculture prices.
U.S. news and economic reporting.  Today’s reporting focus in August employment, beginning with Challenger job cuts (improved to 47.0% from 59.4% in July), and ADP Employment Change (actual 91K, compared to 100K survey and 114K prior).  At 9:45 and 10:00, August Chicago PMI, July factory orders, and NAPM-Milwaukee are released.  
Overseas news: According to today’s press reports, the Eurozone bank regulator is pushing for the emergency stabilization fund to guarantee bank bond sales.  Today, the German cabinet approved the July 21st Eurozone summit proposal to expand powers of the emergency stabilization fund, but the proposal still needs German parliamentary approval and should receive a vote on September 29th.  In August, Eurozone unemployment remained at 10.0%, in-line with expectations.  In the second quarter, Canada’s GDP shrank at a -0.4% annualized rate, the first contraction since the second quarter of 2009. 
Company news/research:
·         None.
2Q2011 Earnings.  The second quarter’s earnings results exceeded revenue and earnings expectations.  Of the 468 S&P500 companies that reported earnings to date, 76% (356 out of 468) 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 12.1x estimated 2011 earnings (increased to $99.95 from $99.15) and 10.8x estimated 2012 earnings ($112.31), compared to 12.2x and 10.8x 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 +5.6%, and +4.7%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.9% and +32.5%, respectively. 
Large-cap banks trade at a median 1.16x tangible book value, and 10.0x and 8.5x 2011 and 2012 consensus earnings, respectively, compared to 1.18x tangible book value and 10.9x/8.6x 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 +31.0% and +65.2%, respectively.
Options.  Options markets are neutral to bearish.  Composite options markets are neutral, equity options markets are neutral to bearish, and index options markets are neutral.  The composite put/call ratio closed at 1.12, below its 5- and 10-period moving averages of 1.14 and 1.20, respectively.  The index put/call ratio closed at 1.55, below the 5- and 10-period moving averages of 1.59 and 1.59, respectively.  The equity put/call ratio closed the day at 0.71, in between its 5- and 10-period moving averages of 0.69 and 0.76, respectively.
Tuesday’s equity markets. On increased volume, the equity markets closed modestly higher, after staging another impressive positive reversal.  The Nasdaq and SPX were up +0.55% and +0.23%, respectively, while the NYSE and DJI were both higher by +0.18%.  Markets began the day indicated lower after the S&P Case Shiller 20 city index showed a month over month loss in home prices.  After the opening, investors awaited the Conference Board’s reading of consumer confidence, which showed confidence at its lowest level since April 2009. Markets rallied immediately, however, and to positive before noon. After some profit taking in front of the 2:00 release of August FOMC minutes, markets sold off, but quickly headed higher, gaining through the late afternoon, before selling off into the close. The VIX reflected the uncertainty in the markets, finishing the day higher, up +1.89%.
Trading desks reported being quiet for the most part, with even amounts of buyers and sellers, but with most accounts on the sidelines. What drove the volatility in the markets and short term swings seemed to be the action in the ETF’s meaning investors, while willing to make a bet on the overall direction of the market, are less inclined to try and pick winning stocks. Volume was higher than Monday’s hurricane affected trading, but less than last Friday. The Bloomberg NYSE new net highs were +29 versus the previous reading of +18. The relative strength indicator rose to 49.59, up slightly from the previous day’s reading of 49.22, and is in the neutral range.
Market segments were mixed. Telecommunications, basic materials, and industrials were the leaders, while technology, utilities, and financials were the laggards.
Financials underperformed the broader indices. The BKX, KRX, and XLF all finished lower, off -0.95%, -0.91%, and -0.68%, respectively.  Financial indices endured a volatile day, with the major ETF’s producing the swings and volume in the larger cap names. The BKX finished the day with only 2 names higher and 22 lower.  The leaders were PBCT and RF, up at least +0.67%. The laggards were KEY, BAC and HBAN, off at least -2.67%. The KRX finished the day with 10 names higher and 40 lower. The leaders in the KRX were TCBI, PVTB and FCF, up at least +0.89%. The laggards were FHN, FULT, and FFBC. The BKX had swings throughout the day as investors sought exposure to financials through ETF’s. This type of activity generally has overstated actions upon individual securities as once the ETF is bought or sold; an opposite transaction has to occur immediately. The BKX, KRX, and XLF each 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 -31.89% below its April 2010 high and -52.19% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume rose +11.5% to 1.017 billion shares, from 912.2 million shares Monday, 0.87x the 1.165 billion share 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +762 (compared to +2786 the prior day), or 1.68:1.  Up volume led down volume by 1.41:1.
SPX. On higher volume, the SPX rose +2.84 points, or +0.23%, to end at 1212.92.  Volume rose +15.63% to 793.78 million shares, up from 686.50 million shares Monday but below the 895.69 million share 50-day moving average.  For the 12th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1257.73 vs. 1283.79 respectively)The SPX closed above its 200-week moving average (1150.73).
The SPX gapped lower at the open to the 1205 level and hovered there through 10:00.  At 10:00, consumer confidence disappointed, and the index fell to 1195.77 by 10:04, setting the intra-day low.  Momentum reversed, and through 11:35, the index rallied.  At 11:30, the SPX retook its 1210 break-even level and nearly broke through 1215 at 11:35.  Meeting resistance at 1215, the index retraced, falling back into negative territory at 12:30 and reaching the 1205 level at 1:00.  The 1205 level provided support, and the index rallied through 3:45.  At 2:10, the index retook positive territory, and at 3:45, the SPX set the intra-day high of 1220.10.  Profit taking appeared into the closing bell, and the index fell back below 1215 in trading’s final minutes but still closed with gains.   
Technical indicators are mostly negative.  Markets, in correction since July 27th, resumed an uptrend with August 23rd’s gains in higher volume and set a recent high yesterday.  The SPX closed below 1300 for the 23rd straight session but above 1200 for the 2nd straight session.  The index closed below its April 2010 highs for the 19th straight session.  The 50-day moving average has been below the 100-day moving average since July 11thThe SPX closed (by +3.22%) above its 20-day moving average (1175.11) for the second straight session.  The index closed (by -3.56%) below its 50-day moving average for the 25th straight session.  The index closed (by -5.93%) below its 100-day moving average (1289.35) for the 24th straight session.  The SPX closed -5.52% below its 200-day moving average, closing below that average for the 20th straight session.  The 200-day moving average rose.  The directional momentum indicator is negative for the 24th straight session but has narrowed considerably, and the trend is very strong but declining.  Relative strength rose to 51.34 from 50.87, a neutral range.  Next resistance is at 1223.42; next support is at 1199.09.
BKX.  On lower volume, the KBW bank index fell -0.38 points, or -0.95%, to end at 39.47, its 20th close below the prior 52-week low of 42.70 from August 25, 2010 and its 17th straight sub-40 close.  Volume fell -13.49% to 94.26 million shares, down from 108.96 million shares Monday and below the 105.48 million share 50-day average.  The BKX closed -8.17% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -31.89% and -29.05% below its April 23, 2010, and February 14, 2011 respective closes.
Financials were the market’s worst performing segment, and regional banks performed in-line with large-cap banks.  Unlike the broader market, the BKX never traded positive on the day.  The index gapped lower at the open to the 39.60 level.  By 9:40, the BKX rallied to 39.70 quickly reversed and began falling into the 10:00 consumer confidence number.  By 9:55, the BKX reached the 39.20 level and at 10:05, the index fell to 38.92, the intra-day low.  Momentum quickly reversed, and by 10:15, the index retook 39.50.  Through 10:50, gains retrace back to 39.20.  A rally at 10:50 took the index nearly back to its break-even line at 11:45, and set the intra-day high of 39.83 then.  Through 1:00, the index retraced back to 39.20, where it traded mostly flat through 2:00.  At 2:15, a rally lifted financials to 39.60 and a 3:30 rally lifted the index back to 39.80.  The index fell into the close with broader market profit taking, and finished towards the middle of the day’s range. 
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 resumed their loss leadership.  Recent gains on higher volume, and bank outperformance, returned markets to an uptrend on August 23rd.  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 (43.70) crossed below the 100- and 200-day moving averages (46.66 and 49.23, respectively) on April 25th and June 16th.  The 20-day closed (by –5.17 points) below the 50-day for the 118th straight day, and the gap expanded.  The 50-day moving average closed (by -5.53 points) below the 200-day moving average for the 55th straight session, and the gap expanded.  The 100-day moving average closed (by –2.57 points) below the 200-day moving average for the 33rd straight session, and the gap expanded.  The index closed above the 20-day moving average for the 2nd straight session.  The index closed below its 50-, 100-, and 200-day moving average for the 37th, 97th, and 63rd consecutive sessions, respectively.  The index closed below 50.00 for the 63rd straight session and below 40.00 for the 17th straight session.  The directional movement indicator is negative for the 26th straight session but has narrowed, and the trend is very strong but declining.  Relative strength fell to 47.39 from 48.63, a neutral range.  Next resistance is 39.89; next support at 38.98.