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U.S. Futures Up But Fading, With Focus on Greece/Eurozone Decision Later Today

|Includes: ACE, COF, ETFC, FMBI, FRC, JPMorgan Chase & Co. (JPM), MA, MCO, MS, NYX, PB, RF, SBNY, SNV, STT, USB, ZION
This morning.  U.S. equity markets are in a confirmed uptrend.  Overall trading patterns suggest an improving equity outlook. However, the strength and durability of the current uptrend, which was confirmed on August 22nd, has been in doubt since August 23rd, when a distribution day immediately followed the confirmation.  Equity options markets suggest a neutral to bearish short-term outlook.  Asian markets closed mixed, with better results in China. Eurozone equities are rebounding on expectations that Greece will receive approval today for a new €8.0 billion support tranche. The U.S. dollar is slightly weaker, but currency markets are weak.  Commodities markets are generally higher.  U.S. Treasury prices are mixed.  LIBOR markets suggest continued interbank lending credit concerns, though the coordinated central bank lending facility seems to have taken the edge off these concerns.  Euribor-OIS spreads are higher.  After a fair value adjustment of +0.44 points, September SPX equity futures are at 1205.50, up +7.16 points. The SPX opens at 1204.09, -11.7% below its recent April 29 multi-year closing high, +1.71% above its 20-day and -1.77% below its 50-day moving averages.  The SPX is -4.26% below its 1257.64 year-end close.  Next resistance is at 1216.60; next support is at 1189.97.
Monday.  U.S. equities fell for the first day in 6 sessions, but ended well off the day’s worst levels. Markets gapped lower on Eurozone sovereign debt concerns, after a weekend meeting of foreign ministers disappointed markets by failing to clarify whether Greece would receive additional funding. The SPX traded to an mid-morning intraday low of 1188.36, then rallied weakly until 3:00, when Reuters reported that the next tranche of the Greek bailout was close to approval. In the final hour, the Nasdaq briefly traded back to gains. At the close, the Nasdaq, DJI, SPX, and NYSE composite were off -0.36%, -0.94%, -0.98%, and -1.55%, respectively.  Most segments closed lower, though technology gained +0.05%. Other leaders were consumer services and utilities.  Oil and gas, basic materials, and financials were the laggards. Financials lost -2.61%.  Volatility rose +5.65% as the VIX ended at 32.73, up from 30.98 the prior day.
Lower volume accompanied yesterday’s index losses, leaving distribution day counts unchanged. Since the August 23rd uptrend confirmation, distributions number 4 on the DJI and SPX, and 3 on the Nasdaq, 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 markets reopened after Monday’s holiday and closed at a new 2011 low on lower volume. Bouncing off a two-year low, Chinese markets rose moderately, with increased volume in Hong Kong, but lower volume in Shanghai.  Markets rallied when Chinese mobile phone carriers reported an increase in subscriber numbers, as European sovereign debt and bank solvency concerns were temporarily assuaged. 
In Japan, the Nikkei closed at 8,721.24, down -1.61%, to close at its worst level of 2011, down -14.7% from year-end 2010.  The NKY closed -0.45% below its 20-day, and below its 50-, 100-, and 200-day moving averages. Commentary focused on Japan’s narrowing yield curve, which signaled a deepening of the current recession. All market segments closed at least -0.51% lower. Leaders were telecommunications, health care, and utilities. Laggards were industrials, financials, and oil and gas.
In China, the Hang Seng and Shanghai composite closed at 19,014.80 and 2,447.76, respectively, up +0.51% and +0.41%. In Hong Kong, volume rose +13.9%. In Shanghai, volume declined -4.95%.  All market segments were lower.  The HSI is off -17.5% in 2011, while the SHCOMP is down 12.8% in 2011. In Hong Kong, the HSI opened higher, but traded to a mid-morning intraday low of 18,732.80 before a mid-day rally carried the index back to resistance at 19,000 just before mid-day. After some renewed weakness brought the HSI back to 18,800, the index rallied through the final two hours to close near the afternoon’s highs. Market segments were mixed. Telecommunications, utilities, and basic materials gained at least +1.48%. Financials gained +0.53%. Consumer goods, technology, and industrials lagged with losses of at least -0.40%.  The SHCOMP traded sideways through most of the morning, but rallied at mid-day to an intraday high of 2460.03, before fading back to the prior day’s close in late afternoon. A late rally salvaged a modest gain. Technology, basic materials, and industrials were the segment leaders. Consumer goods, health care, and telecommunications lagged. The SHCOMP closed -12.8% below its 2010 close and -6.56% below its 50-day moving average.
In Europe, equities markets opened lower, but rallied immediately and presently trade near their intraday highs. On the EuroStoxx50, health care, utilities, and basic materials are segment leaders. Telecommunications, oil and gas, and financials are the laggards. Financials are up +0.47%. The Euro Stoxx 50, FTSE, and DAX are up +1.66%, +1.41%, and 2.25%, 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 fell to 0.14667% from 0.14833% Monday, but down from 0.25188% at year-end.  USD 3-month LIBOR rose to 0.35500%, from 0.35250% the prior day, the highest level of the year.
·         The US Libor-OIS (LOIS) spread fell to 29.0 bps, from 28.3 bps the prior day and 12.0 bps at the end of 2010.  Euribor-OIS rose to 80.0 bps from 78.5 bps Monday, 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 2 bps, unchanged from the prior day, and down from 16 bps last Thursday 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$77.032, compared to US$76.146 the prior day, and above its US$74.882 50-day, US$74.904 100-day, and US$76.103 200-day averages.  The euro trades at US$1.3687, compared to US$1.3686 Friday and US$1.3796 the prior day.  The euro trades below its US$1.4197 50-day and US$1.4266 100-day averages.  In Japan, the dollar trades at ¥76.56, compared to ¥76.58 Monday and ¥76.79 the prior day.  The yen trades better than its 50-day moving average ¥77.394.
·         U.S. Treasury yields are mixed, with 2- and 10-year maturities yielding 0.149% and 1.970%, respectively, compared to 0.153% and 1.951% Monday.  The yield curve widened to +1.821% from +1.798% 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 mostly higher, with higher petroleum, precious metals, lower aluminum and copper, and higher agricultural prices.
U.S. news and economic reporting.   Today’s economic reporting is focused on August housing starts and building permits. The FOMC begins its two-day meeting today, which is expected to end with its report tomorrow at 2:15. The World Bank/IMF annual meeting begins Friday.
Overseas news: Today, Standard and Poor’s cut Italy’s sovereign debt rating one notch to A from A+ and placed the country on negative watch for further review.  Today, senior officials from the European Central Bank, the IMF, and the European Union hold the second part of a two-day conference call with Greek finance officials to discuss the country’s progress towards meeting its austerity targets.  Today, Greece successfully made a €769 million coupon payment.  Today, Solvenia’s government faces a closely contested confidence vote, which, should it fail, casts doubt on expedited approval of the enhanced European Union bailout fund’s powers.  Last night, the Bank of China halted foreign currency forwards and swaps trading with several large European banks. 
Company news/ratings changes:
·         JPM – initiated at buy at Evercore, price target of $46
2Q2011 Earnings.  The second quarter’s earnings results exceeded revenue and earnings expectations.  Of the 476 S&P500 companies that reported earnings to date, 75% (358 out of 476) 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 12.1x estimated 2011 earnings ($99.40) and 10.8x estimated 2012 earnings ($111.34), compared to 12.2x and 10.9x 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 +5.1%, and +3.8%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.2% and +31.3%, respectively. 
Large-cap banks trade at a median 1.15x tangible book value, and 10.4x and 8.4x 2011 and 2012 consensus earnings, respectively, compared to 1.18x tangible book value and 10.6x/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 +35.8% and +65.2%, respectively.
Options.  Options markets are turning bearish.  Composite options markets are bearish, equity options markets are neutral to bearish, and index options markets are neutral to bearish.  The composite put/call ratio closed at 1.03, compared to 1.01 Thursday and below its 5- and 10-period moving averages of 1.10 and 1.16, respectively.  The index put/call ratio closed at 1.29, compared to 1.23 Thursday and below the 5- and 10-period moving averages of 1.39 and 1.46, respectively.  The equity put/call ratio closed the day at 0.67, compared to 0.68 Thursday and below its 5- and 10-period moving averages of 0.69 and 0.72, respectively.
Monday’s equity markets.  Compared to Friday’s options expiration, volume fell. Equity markets closed lower, but well off their intraday lows.  The NYSE, SPX, DJI, and Nasdaq fell -1.55%, -0.98%, -0.94%, and -0.36%, respectively.  Futures indicated a substantially lower open after a weekend meeting of Eurozone finance ministers failed to clarify whether  Greece would  receive more financial aid to avoid an October debt default.  Markets gapped lower, with the SPX touching an intraday low of 1188.36 at 10:30.  Through the balance of the morning,  markets gained slightly. Markets rallied strongly in the final hour, after a news report that the “Troika” (International Monetary Fund, European Commission, and the European Central Bank) and Greece were near agreement. Talks will resume Tuesday afternoon.
Volatility rose. The VIX closed at 32.73, up +5.65%. Trading desks saw sellers and short sellers in the morning.  Those orders disappeared heading in early afternoon, with the small rally causing some short covering.  Greek/Troika news in the last hour caused some short term shorts to rush for cover and explained the strength and speed of the rally.  This market and its participants remain focused on everything European, and investors fear being caught on the wrong side of a trade.  The Bloomberg NYSE new net highs were -53 versus the previous day’s reading of +15. The relative strength indicator fell to 46.69 from the previous reading of 50.27, and is in the low end of a neutral range.  Market segments were mixed. Technology, consumer services, and utilities were the leaders, while oil and gas, basic materials, and financials were the laggards.
Financials were the worst performing sector. The KRX, BKX, and XLF substantially underperformed the broader indexes, off -3.36%, -2.84%, and -2.67%, respectively.  The BKX sold off on concerns about the European debt crisis and its effects on banks in euro zone banks and traded near its bottom for most of the day.  The BKX rallied with the broader indices in the last hour on positive posturing from the meetings involving Greece and their lenders.  The BKX finished with all 24 names lower.  Leaders were COF, USB, and NYB, while laggards were RF, STT, and ZION.  The KRX finished with all 50 names lower.  The leaders were PRSP, FRC, and SBNY, while the laggards were SNV, FMBI, and PNFP. Among the broader financials, MS, ETFC and NYX were worst performers, while MA, MCO and ACE performed better than their peers. This group remains focused on movements involving the debt crisis in Europe, with small tidbits of news driving names higher or lower. Investors have been small buyers of the highest quality names within the sector not wishing to miss the bottom of an oversold group, but not yet ready to commit fully either. 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 -35.13% below its April 2010 high and -54.46% below its best level of 82.55 in September 2008.
NYSE Indicators.  Volume fell -49.9% to 908.4 million shares, from 1.814 million on Friday’s options expiration, 0.75x the 1.208 billion share 50-day moving average.  Market breadth was negative, and up volume lagged down volume.  Advancing stocks lagged decliners by -1,647 (compared to +53 the prior day), or 0.29:1.  Up volume led down volume by 0.16:1.
SPX. On lower volume, the SPX fell -11.92 points, or -0.98%, to end at 1204.09.  Volume fell -52.90% following Friday’s elevated, option expiration-inspired volume, to 738.70 million shares, down from 1,568 million shares Friday and below the 950.84 million share 50-day moving average.  For the 25th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1225.75 vs. 1283.49 respectively)The SPX closed above its 200-week moving average (1146.64).
The SPX gapped lower at the open to 1197 and fell through 10:15 to the intra-day low of 1188.36, down nearly -30 points or -2.3% intra-day.  Through 11:35, stocks rallied to 1199.  Failing to break through 1200, the SPX sold off through 1:15 back to the 1192 level.  Momentum reversed again, and through 2:50, equities rallied and briefly breached the 1200 level at 2:50.  Stocks retraced back to 1196 by 3:10 when headlines from Greek officials claiming an agreement was near for the next tranche of bailout funding send markets higher.  The SPX rose 7 points in 5 minutes to break through 1200 and continued rising through 3:40 and reached 1210.03, the intra-day high.  A closing bell sell-off sent the index just below 1205 where it closed at the high end of the day’s trading range. 
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 36th straight session but above 1200 for the third straight session.  The index closed below its April 2010 highs for the 31st time in the last 32 sessions.  The 50-day moving average has been below the 100-day moving average since July 11thThe SPX closed (by +1.71%) above its 20-day moving average (1183.86) for the fourth straight session.  The index closed (by -1.77%) below its 50-day moving average for the 38th straight session.  The index closed (by -5.30%) below its 100-day moving average (1271.50) for the 37th straight session.  The SPX closed -6.19% below its 200-day moving average, closing below that average for the 33rd straight session.  The 20-day moving averages rose.  The directional momentum indicator is negative for the 36th straight session but has narrowed considerably, and the trend is moderate and declining.  Relative strength fell to 51.78 from 54.38, a neutral range.  Next resistance is at 1216.60; next support is at 1189.97.
BKX.  On lower volume, the KBW bank index fell -0.90 points, or -2.84%, to end at 37.59, its 33rd close below the prior 52-week low of 42.70 from August 25, 2010 and its 30th straight sub-40 close.  Volume fell -51.90% to 77.46 million shares, down from 161.03 million shares Friday on options expiration and below the 112.60 million share 50-day averageThe BKX closed -12.54% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -35.13% and -32.43% below its April 23, 2010, and February 14, 2011 respective closes.
Financials were the market’s worst performing sector, and regional banks underperformed large-cap banks.  The BKX traded in negative territory all day.  The index gapped lower at the open to 38.03, down -1.72% and setting the intra-day high.  Through 10:30, the index continued falling and reached 37.26.  Finding support there, financials recovered positive momentum and slowly reversed losses to the 37.60 level by 12:05.  Through 1:15, the index sold-off back to 37.35.  A rally to the 37.50 level was sold at 2:50, and the index fell to 37.25 at 3:10, setting the intra-day low and down -3.70% intra-day.  Financials rallied on positive Greek headlines at 3:10 and reached 37.96 by 3:40.  Momentum reversed into the close, and the index fell back to 37.59 at the bell, finishing in the middle of the day’s trading range. 
Technical indicators are negativeBank 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 (41.09) crossed below the 100- and 200-day moving averages (44.94 and 48.70, respectively) on April 25th and June 16th.  The 20-day closed (by -3.28 points) below the 50-day for the 131st straight day, but the gap narrowed.  The 50-day moving average closed (by -7.62 points) below the 200-day moving average for the 68th straight session, and the gap expanded.  The 100-day moving average closed (by -3.76 points) below the 200-day moving average for the 46th straight session, and the gap expanded.  The index closed above its 20-day moving average for the fourth straight session.  The BKX closed below its 50-, 100-, and 200-day moving averages for the 50th, 51st, and 76th consecutive sessions, respectively.  The index closed below 50.0 for the 76th straight session and below 40.00 for the 30th straight session.  The directional movement indicator is negative for the 39th straight session but has narrowed considerably, and the trend is moderate and declining.  Relative strength fell to 45.48 from 49.53, a neutral range.  Next resistance is 38.26; next support at 37.08.