This morning. Today is the 3rd anniversary of the Lehman bankruptcy. U.S. equity markets are in a confirmed uptrend, buoyed by three consecutive days’ gains. Notwithstanding, the major equity indexes are all lower in September. Overall trading patterns suggest an improving equity outlook, but the strength and durability of the current uptrend have been in doubt since the August 22nd uptrend confirmation was followed by a distribution day on August 23rd. Equity options markets suggest a neutral short-term outlook. Asian markets closed mixed on mixed volume, with the better result in Japan. Despite news of a $2.0 billion unauthorized trading loss at UBS, Eurozone equities are higher, extending the prior day’s gains. The U.S. dollar is weaker. Commodities markets are mixed. U.S. Treasury prices are lower. LIBOR markets suggest heightened interbank lending credit concerns. Euribor-OIS spreads continue to trend higher. After a fair value adjustment of +0.28 points, September SPX equity futures are at 1192.60, up +10.12 points. The SPX opens at 1188.68, -12.8% below its recent April 29 multi-year closing high, +1.14% above its 20-day and -3.66% below its 50-day moving averages. The SPX is -5.48% below its 1257.64 year-end close. Next resistance is at 1206.46; next support is at 1166.81.
Wednesday. On increased volume,U.S. equities extended the prior two day’s gains, but met with resistance in the final hour and finished well off the day’s best levels. The NYSE composite, Nasdaq, SPX, and DJI added +2.16%, +1.60%, 1.35%, and +1.27%, respectively. All segments closed higher, led by industrials, technology, and consumer services. Financials added +1.28%. Health care, utilities, and telecommunications, were the laggards, but added at least +0.52%. Volatility fell, with the VIX down -6.26% to end at 34.60, down from 36.91 at the prior close.
Since the August 23rd uptrend confirmation, distributions number 4 on the DJI, and 3 on the Nasdaq, SPX, NYSE composite, and BKX. 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 closed higher on lower volume, while Chinese equity markets closed mixed with higher volume in Shanghai, lower in Hong Kong. Trading desks attributed the generally positive trade to remarks by Sarkozy and Merkel on Greek debt.
In Japan, the Nikkei closed at 8668.86, up +1.76% on a +1.55% increase in volume. The day’s gains came with the gapped open. The index traded to a mid-morning intraday high of 8695.95, but found resistance at that level. The NKY traded back to 8630 by mid-day, and traded sideways through most of the afternoon, before rallying mildly into the close. and traded , opened modestly higher and rose to a 8671.24 intraday high, but began to trend lower by mid-morning and closed near its 8499.34 intraday low. gapped higher to 8580, fell through mid-morning but remained positive, and rallied into the close to finish near the day’s highs. All market segments closed higher. Telecommunications, basic materials, and industrials were the leaders, up at least +1.80%. Laggards were financials, health care, and utilities, which rose at least +0.44%. The NKY closed below its 50-, 100-, and 200-day moving averages, and -15.3% below its 2010 close.
In China, the Hang Seng closed at 19,181.50, up +0.71%. Volume fell -21.6%. Market segments were mixed, led by utilities, oil and gas, and financials (which gained at least +1.16%). Consumer goods, technology, and consumer services lagged with losses of at least -1.79%. The HSI gapped higher to an intraday high of 19269.40, but traded back to an afternoon loss and intraday low of 18935.1, before rallying into the close. The SHCOMP fell -0.23%, but volume rose +3.52%. The index initially traded higher, but trended lower through early afternoon to a intraday low of 2439.37, before rallying strongly to close just short of the 2485.93 intraday high. Market segments were mixed, led by telecommunications, consumer goods, and technology. Financials, basic materials and oil and gas were the day’s laggards. The SHCOMP closed at 2479.05, -11.7% below its 2010 close and -6.09% below its 50-day moving average.
In Europe, equities markets gapped higher and have generally strengthened through the morning. Despite news that UBS suffered a large unauthorized trading loss, financials are up +2.84%. All market segments are higher, led by utilities, industrials, and financials. Oil and gas, consumer goods, and consumer services are the laggards, but with gains of at least +0.85%. The Eurostoxx50, FTSE, and DAX are up +2.30%, +1.94% and +2.34%, respectively.
Libor, LOIS, Currencies, Treasuries, Commodities:
· Interbank lending rates continue to reflect increased stress, as concerns heighten regarding the health of Eurozone banks in a stressed economic environment. Overnight USD LIBOR rose to 0.14722%, compared to 0.14667% Wednesday, but down from 0.25188% at year-end. USD 3-month LIBOR rose to 0.35022%, from 0.34911% the prior day, the highest level of the year.
· The US Libor-OIS (LOIS) spread is unchanged at 28.0 bps, compared to 27.6 bps the prior day and 12.0 bps at the end of 2010. Euribor-OIS fell to 77.5 bps, from 79.6 bps Wednesday, and compares to 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 7 bps, unchanged from 7 basis points the prior day, and well off from a recent high of 33 bps on August 2nd.
· The U.S. dollar is slightly weaker against the euro, yen, and pound. The dollar trades at US$76.580, compared to US$76.833 the prior day, and higher than its US$74.813 50-day, US$74.790 100-day, and US$76.145 200-day average. The euro trades at US$1.3804, compared to US$1.3755 Wednesday and US$1.3678 the prior day. The euro trades below its US$1.4218 50-day and US$1.4299 100-day averages. In Japan, the dollar trades at ¥76.61, compared to ¥76.62 Wednesday and ¥76.96 the prior day. The yen trades better than its 50-day moving average ¥77.597.
· U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.189% and 2.051%, respectively, compared to 0.185% and 1.984% Wednesday. The yield curve widened to +1.862% from +1.799% the prior day. In the past year, the 2- and 10-year spread has varied from a low of +1.742% on September 12, 2011 to a high of +2.910% on February 4, 2011.
· Commodities prices are mixed, with higher petroleum, lower precious metals, aluminum and copper, and mixed agricultural prices.
U.S. news and economic reporting. Today’s economic reporting focuses on the latest week’s initial and continuing claims at 8:30, August CPI, August industrial production and capacity utilization at 9:15, and the Philadelphia Fed, at 10:00.
Overseas news: Today, Greece reported that 82% of debt holders agreed to participate in the country’s proposed debt swap, signaling the 90% goal will be met. Today, press reports indicate China’s sovereign wealth fund could take up to a 20% stake in Italy’s strategic investment fund, designed to shore up infrastructure, security, transport, and energy companies. Today, German Chancellor Merkel reiterated her view that Eurobonds are “absolutely wrong.” Spain’s housing prices fell -6.8% over the prior year’s level, the largest year-over-year drop since mid-2010. Today, a survey by China’s central bank revealed inflation expectations are rising with most respondents thinking prices are unacceptably high.
Company news/ratings changes:
· UBS – revealed it may suffer up to a $2 billion loss from unauthorized trading
· COF – August Master Trust data: net charge-offs rise to 4.1% from 3.77%, delinquencies rise to 3.43% from 3.37%
· AXP – August Master Trust data: net charge-offs fall to 2.7% from 2.8%, delinquencies fall to 1.4% from 1.5%
2Q2011 Earnings. The second quarter’s earnings results exceeded revenue and earnings expectations. Of the 475 S&P500 companies that reported earnings to date, 76% (358 out of 475) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +4.9% (versus a historical average of +2%). EPS is up +16.4% 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 third quarter of 2011, analysts estimate the SPX will earn $24.98 per share, compared to $24.84 and $21.49 per share in 2Q11 and 3Q10, a +0.6% and +16.2% 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 11.9x estimated 2011 earnings ($99.68) and 10.6x estimated 2012 earnings ($111.79), compared to 11.8x and 10.5x 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 +5.4%, and +4.2%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.6% and +31.9%, respectively.
Large-cap banks trade at a median 1.12x tangible book value, and 10.0x and 8.3x 2011 and 2012 consensus earnings, respectively, compared to 1.12x tangible book value and 10.0x/8.3x 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 +35.9% and +65.2%, respectively.
Options. Options markets are neutral. 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 1.03, below its 5- and 10-period moving averages of 1.19 and 1.19, respectively. The index put/call ratio closed at 1.32, below the 5- and 10-period moving averages of 1.50 and 1.51, respectively. The equity put/call ratio closed the day at 0.65, below its 5- and 10-period moving averages of 0.74 and 0.72, respectively.
Wednesday’s equity markets. On higher volume, equity markets added impressively to the prior two days’ gains, but met resistance late in the day and closed off their best intraday levels. The Nasdaq, SPX, DJI, and NYSE ended up +1.60%, +1.35%, +1.27%, and +1.25%, respectively. Markets opened higher after receiving news of weaker than expected advance retail sales. The major indices sold off in the first hour, seeing their lows just before 10:30. The markets rallied for the balance of the morning with their European counterparts. The rally extended into the afternoon as Germany and France reiterated their support of continued Greek membership in the Eurozone. Greek Prime Minister Papandreou pledged Greek efforts to meet deficit-reduction targets. The rally stalled when the SPX hit 1200 and sold off into the close to finish off its highs. The VIX finished the day at 34.60, down -6.26%.
Trading desks indicated that they were generally quiet as investors seem to step to the sidelines. They spoke of some light large fund buying in the afternoon, which helped propel the advance, but also attributed the advance to a lack of sellers and short sellers. They did comment that a number of short sellers were not active Wednesday, neither pressing their shorts nor covering. Investors are concerned that this week’s ~3% gain in the SPX is overdone as economic data remain soft. Many watch the 1200 level in the SPX and the balance of the week’s economic data, some of which will give a first look at September data. The AAII Investor Sentiment Index is 30.50, up from the previous reading of 30.22. The Bloomberg NYSE new net highs were -21.00 versus Tuesday’s reading of -27. The relative strength indicator rose to 45.50 versus the previous reading of 42.46, still in the lower end of a neutral range.
Market segments were positive. Industrials, technology, and consumer services were the leaders, while health care, utilities, and telecommunications were the laggards.
Financials performed slightly better that the major averages. The KRX, BKX, and XLF were all higher, finishing up +1.92%, +1.71%, and +1.20%, respectively. The banks continue to lead financials higher as a financial conference being held provides some clarity and the tone of management seems hopeful. The BKX began the day higher, but sold off with the rest of the markets. The mid-morning recovery and gain through the balance of the day was strong. Traders attributed the strong gains more to a lack of sellers than very strong buyers however. The BKX finished the day with 23 names higher and 1 lower. Leaders included HBAN, NYB, and STI, while the laggards were BAC, MTB, and RF. The KRX finished the day with 48 names higher and 2 lower. BPFH, WBS, and NPBC were the leaders, while FRC, TRMK, and FMBI were the laggards. Among broader financials, NYX, HIG, and PFG were the leaders, up at least +4.66%. 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 -34.46% below its April 2010 high and -53.99% below its best level of 82.55 in September 2008.
NYSE Indicators. Volume rose +1.37% to 1.085 billion shares, from 1.071 billion shares Tuesday, 0.92x the 1.183 billion share 50-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +1,430 (compared to 1,569 the prior day), or 2.83:1. Up volume led down volume by 5.80:1.
SPX. On higher volume, the SPX rose +15.81 points, or +1.35%, to 1188.68. Volume rose +6.62% to 887.53 million shares, up from 832.45 million shares Tuesday but below the 926.06 million share 50-day moving average. For the 22nd straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1233.89 vs. 1283.39 respectively). The SPX closed above its 200-week moving average (1147.69).
The SPX opened slightly above the prior 1174 close to the 1178 level. Through 10:15, the market traded mostly sideways when a sell-off at 10:15 took the index into negative territory and the intra-day low of 1162.73. News that an Austrian Parliamentary committee voted down the enhanced European rescue fund hurt confidence. Momentum quickly recovered, and the index rallied back to break-even by 11:05. The market melted up through 3:30, when the index set the intra-day high of 1202.38, a +40.0 point move from the day’s low. The index sold off into the close, crossing back below the 1200 level at 3:40 and finishing just below the 1190 level.
Technical indicators are neutral to negative. Markets, in correction since July 27th, resumed an uptrend with August 23rd’s gains in higher volume. The SPX closed below 1300 for the 33rd straight session and below 1200 for the eighth straight session. The index closed below its April 2010 highs for the 28th time in the last 29 sessions. The 50-day moving average has been below the 100-day moving average since July 11th. The SPX closed (by +1.14%) above its 20-day moving average (1175.30) for the first time in four sessions. The index closed (by -3.66%) below its 50-day moving average for the 35th straight session. The index closed (by -6.81%) below its 100-day moving average (1275.59) for the 34th straight session. The SPX closed -7.38% below its 200-day moving average, closing below that average for the 30th straight session. The 200-day moving average rose. The directional momentum indicator is negative for the 34th straight session, and the trend is moderate and stable. Relative strength rose to 49.23 from 46.03, a neutral range. Next resistance is at 1206.46; next support is at 1166.81.
BKX. On lower volume, the KBW bank index rose +0.64 points, or +1.71%, to end at 37.98, its 30th close below the prior 52-week low of 42.70 from August 25, 2010 and its 27th straight sub-40 close. Volume fell -4.46% to 91.13 million shares, down from 95.38 million shares Tuesday and below the 109.73 million share 50-day average. The BKX closed -11.63% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -34.46% and -31.73% below its April 23, 2010, and February 14, 2011 respective closes.
Financials underperformed the market on weakness in the real estate and insurance sectors, and large-cap banks underperformed regional banks. The BKX opened higher to 37.60 and traded sideways through 10:00. At 10:00, a sell-off dropped the index -0.25 points to the 37.37 break-even line. A second sell-off at 10:15 dropped the index another -0.40 points into negative territory and to 36.99 by 10:21, setting the intra-day low. At 10:35, the index rallied from 378.00 back to 37.65 by 11:30. Through 1:30, financials traded mostly sideways between the break-even line and their opening 37.60 level. At 1:35, a rally took hold and accelerated through 3:30. The index reached 38.43 at 3:30, setting the intra-day high. The BKX fell with the broader market in trading’s final 30 minutes and retraced gains back to 38.00. The BKX finished just below that level at the bell.
Technical indicators are negative. Bank stocks significantly underperformed the broader market during the May-June correction and the late July-mid August sovereign debt crisis sell-off. 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 (41.70) crossed below the 100- and 200-day moving averages (45.32 and 48.85, respectively) on April 25th and June 16th. The 20-day closed (by -4.11 points) below the 50-day for the 128th straight day, but the gap narrowed. The 50-day moving average closed (by -7.15 points) below the 200-day moving average for the 65th straight session, and the gap expanded. The 100-day moving average closed (by -3.53 points) below the 200-day moving average for the 43rd straight session, and the gap expanded. The index closed above its 20-day moving average for the first time in five sessions. The BKX closed below its 50-, 100-, and 200-day moving averages for the 47th, 48th and 73rd consecutive sessions, respectively. The index closed below 50.0 for the 73rd straight session and below 40.00 for the 27th straight session. The directional movement indicator is negative for the 36th straight session, and the trend is moderate and declining. Relative strength rose to 46.87 from 44.38, a neutral range. Next resistance is 38.61; next support at 37.17.