This morning. U.S. equity markets are in correction. Equity options markets suggest a neutral to bullish short-term outlook. Asian markets closed mixed, with Japan rising nearly a percent after an impressive increase volume positive reversal. Hong Kong markets were closed due to typhoon. Eurozone equities rallied strongly, after the German parliament’s approval of an enlarged stabilization fund and better than expected U.S. weekly jobless data. The U.S. dollar is slightly weaker. Commodities markets are mixed, but a -4.5% decline in copper is particularly noteworthy. U.S. Treasury prices are little changed on the day. LIBOR markets suggest continued interbank lending credit concerns, and Euribor-OIS spreads widened again today. After a fair value adjustment of -3.24 points, December SPX equity futures are at 1163.60, up +17.74 points. The SPX opens at 1151.06, -15.6% below its April 29 multi-year closing high, -2.36% below its 20-day and -4.40% below its 50-day moving averages. The SPX is -8.47% below its 1257.64 year-end close. Next resistance is at 1173.71; next support is at 1139.40.
Thursday. U.S. equity markets opened higher, but reversed lower after 1:00, trading lower in the final hour to end with substantial losses, though volume was lower in all the major exchanges. The NYSE composite lost -2.36%, followed by the Nasdaq, SPX, and DJI, which shed -2.17%, -2.07%, and -1.61%, respectively. From its prior close at 1175.38, the SPX rose to an intraday high of 1184.71 just before 10:00. By 11:00, the SPX test support at 1170, then rallied, but found resistance at 1180 just before noon. Markets traded lower through the day’s remainder, but losses accelerated in the final hour. Traders attributed the weakness to Eurozone issues, and comments that questioned support for an expanded stabilization fund. The NYSE composite ended with the day’s best +1.47% gain, followed by the DJI, Nasdaq, and SPX, which closed with respective gains of +1.33%, +1.20%, and +1.07%. All market segments closed at least +0.30% higher. Basic materials, industrials, and oil and gas were the segment leaders, with gains of at least +1.51%. Financials, consumer services, and utilities were the laggards, but ended at least +0.30% higher. Volatility rose +8.94% to 41.08, from 37.71 at the prior day’s close.
In Asia, on increased volume, equity markets closed mixed, with Japan higher and China lower. Due to weather, Hong Kong was closed. In Japan, traders cited progress in Europe’s sovereign debt negotiations, as Greece appears poised to receive its next aid tranche. In China, traders cited doubts regarding the sufficiency and efficacy of the Eurozone’s progress. In Tokyo and Hong Kong, neither equity market traded with much conviction. In Shanghai, the trend was distinctly lower through the day, with a greater focus on a prospective slowing of the Chinese economy. One report cited the need for property developers to cut prices on condominiums in order to reduce growing inventories.
In Japan, on an impressive positive reversal, the Nikkei ended +0.99% on an impressive +18.6% increase in volume, to close at 8,701.23, compared to 8,615.65 at the prior day’s close. Traders attributed the reversal to news that the German parliament would approve to enlarge the European Financial Stabilization Fund (EFSF). The NKY initially gapped lower and traded -1.34% lower early in the trade, but found support at the 8,500 level and rebounded back to 8,550 by late morning, when a strong rally ensued. The index moved back to par at noon, retested support at the 8,600 level in late afternoon, and rallied strongly into the close to end just short of the 8,706.14 intraday high. All market segments closed at least +0.07% higher. The best segments were technology, financials, and consumer goods, which rose at least +1.34%. Oil and gas, basic materials, and telecommunications were the laggards. The NKY is down -14.9% in 2011 and is -4.41% below its 50-day moving average.
In China, the Shanghai composite closed at 2,365.34, down -1.12%. Volume rose +5.82%. Traders attributed the weakness to concerns that monetary policy would remain tight and that economic growth would weaken further. The SHCOMP gapped modestly lower, traded to a mid-morning low of 2358.57, rebounded back to 2386 just before noon, traded sideways through mid-afternoon, and trended lower into the close. Most segments closed lower. Oil and gas added +0.36%. Financials and telecommunications were the other leaders, but lost at least -0.34%. Consumer services, health care, and technology were the weakest segments, losing at least -2.26%. The SHCOMP closed -15.8% below its 2010 close and -7.91% below its 50-day moving average.
In Europe, equities markets are mixed and off their best levels of the day. The Euro Stoxx 50 is up +0.43%. The FTSE and DAX and DAX are down -0.70% and -0.07%, respectively. On the EuroStoxx50, market segments are mixed, led by financials, health care, and consumer services. Financials are up +1.95%. Basic materials, oil and gas, and consumer goods are the laggards, off at least -0.10%.
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 is 0.14500%, down from 0.14611% Wednesday, but down from 0.25188% at year-end. USD 3-month LIBOR rose to 0.37211%, the highest level of the year, up from 0.36856% the prior day and compared to 0.30281% at year-end 2010.
· The US Libor-OIS (LOIS) spread rose to 28.2 bps, from 28.1 bps the prior day and 12.0 bps at the end of 2010. Euribor-OIS rose to 83.2 bps from 78.0 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 unchanged at 3 bps, but down from 16 bps Monday, and well off from a recent high of 33 bps on August 2nd.
· The U.S. dollar is mixed this morning, slightly weaker against the euro, and pound, but slightly stronger against the yen. The dollar trades at US$77.765, compared to US$77.852 the prior day, and above its US$75.295 50-day, US$75.142 100-day, and US$76.015 200-day averages. The euro trades at US$1.3619, compared to US$1.3543 Wednesday and US$1.3585 the prior day. The euro trades below its US$1.4107 50-day and US$1.4206 100-day averages. In Japan, the dollar trades at ¥76.65, compared to ¥76.61 Wednesday and ¥76.81 the prior day. The yen trades better than its 50-day moving average ¥77.056.
· U.S. Treasury yields are little changed, with 2- and 10-year maturities yielding 0.246% and 1.979%, respectively, compared to 0.246% and 1.980% Wednesday. The yield curve narrowed to 1.733% from +1.734% the prior day. In the past year, the 2- and 10-year spread has varied from a low of +1.520% on September 22, 2011, to a high of +2.910% on February 4, 2011.
· Commodities prices are mixed, with higher petroleum, higher precious metals, lower aluminum and copper, and mixed agricultural prices. A downward move in copper of nearly -4.50% is particularly noteworthy.
· The Euro Stoxx 50 volatility (V2X) index fell -2.33% to 45.31, down from 46.39 the prior day. The V2X index trades -1.33% below its 20-day moving average of 45.55, -19.6% below the 56.34 30-day high, and +35.76% above the 34.17 30-day low.
· The Hang Seng volatility index (VHSI) rose +2.31% to 40.68, up from 39.76 the prior day. The VHSI index trades +13.76% above its 20-day moving average of 35.76, -15.07% below the 47.90 30-day high, and +55.68% above the 25.54 30-day low.
· CBOE skew ended at 118.21, down -1.12% from 119.55 at the prior close.
U.S. news and economic reporting. Economic reports focus at 8:30, on initial jobless claims, and the 3rd revision of 2Q2011 GDP, personal consumption, and core PCE. Initial jobless claims fell to 391K, down from a revised 428K the prior week. Final 2Q2011 GDP was +1.3%, better than +1.2% survey and +1.0% in 1Q2011.
Overseas news: Today, Germany’s parliament approved the July 21st summit agreement expanding the Emergency Financial Stabilization Fund’s powers. Today, Italy sold €7.86 of 3- and 11-year bonds at auction, lower than the maximum target of €9 billion with yields climbing between +64 to +79 basis points compared to the August auctions.
Company news/ratings changes:
· CBSH – initiated at neutral at Guggenheim, $37 price target.
2Q2011 Earnings. The second quarter’s earnings results exceeded revenue and earnings expectations. Of the 495 S&P500 companies that reported earnings to date, 75% (373 out of 493) 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 +16.5% 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 11.6x estimated 2011 earnings ($99.27) and 10.3x estimated 2012 earnings ($111.34), compared to 11.8x and 10.6 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 +4.9%, and +3.8%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.1% and +31.3%, respectively.
Large-cap banks trade at a median 1.11x tangible book value, and 9.8x and 7.9x 2011 and 2012 consensus earnings, respectively, compared to 1.13x tangible book value and 10.4x/8.2x 2011/2012 earnings Friday. 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 +37.7% and +65.2%, respectively.
Options. Options markets are neutral to bullish. Composite options markets are bullish, index options markets are bullish, and equity options markets are neutral. The composite put/call ratio closed at 1.41, compared to 1.12 yesterday and above its 5- and 10-period moving averages of 1.19 and 1.14, respectively. The index put/call ratio closed at 2.01, compared to 1.61 yesterday and above the 5- and 10-period moving averages of 1.65 and 1.55, respectively. The equity put/call ratio closed the day at 0.88, compared to 0.63 yesterday and above its 5- and 10-period moving averages of 0.73 and 0.71, respectively. The Skew Index, which measures the richness of puts versus calls, closed at 118.21, a neutral level. Skew finished -0.93% below its 119.32 20-day moving average, -5.0% below its 124.44 30-day high and +3.30% above its 115.73 30-day low.
Wednesday’s equity markets. On lower volume, equity markets reversed early gains and ended with substantial losses. The NYSE, Nasdaq, SPX and DJI were all lower, off -2.36%, -2.17%, -2.06%, and -1.61%, respectively. Futures indicated a higher open on optimism that European leaders would further efforts to rescue Greece and stabilize the Club Med countries. Markets opened higher, but turned lower in the first hour. Markets were primarily lower throughout the morning, but briefly managed to turn positive in early afternoon. Shortly after 1:00, the markets moved further into negative territory, rebounding slightly from 2:00 to 3:00, but turning down sharply in the last 45 minutes to finish at their lows. The lower finish halted a 3-day rally for the SPX. Wednesday’s move lower stems from ongoing concerns about Europe and its ongoing debt crisis. Officials of some European governments are still pushing for additional write downs on banks’ holdings of Greek government debt than those agreed to at the July 21st summit which made investors nervous about Thursday’s vote on the European Financial Stabilization Fund in Germany. The VIX ended the day at 41.08, up +8.94%.
Trading desks report that investors remain biased to de-risk. The majority of their customers were better sellers. Traders attributed the selling to several factors including month-end, the Jewish holiday, and the pending vote in Germany on the EFSF. The AAII Investor Bullish Sentiment Index was 32.51 versus last week’s reading of 25.33. The Investment Company Institute reported domestic equity outflows for the week ended September 21st of -2.776mm as compared to outflows of -1.982mm the previous week. This is the second week in a row for negative outflows and 6th week of negative readings in the last 8 weeks. The Bloomberg NYSE new net highs were -89 versus the previous reading of -3. The relative strength indicator fell to 41.02 from 45.31 and is in the lower end of a neutral range.
All market segments were negative. Telecommunications, utilities, and technology were the leaders, while financials, oil and gas and basic materials were the laggards.
Financials underperformed the broader market. The KRX, BKX, and XLF were all lower, off -4.93%, -3.45%, and -2.90%, respectively. The BKX began the day higher, but lost gains with the rest of the markets after the first hour. The balance of the morning and most of the early afternoon saw a relatively range bound tape. Speculation about Germany’s vote on the EFSF and continued claims for extending write downs on Greek government debt unnerved investors in the last hour as they sold stocks drastically lower. There remains some speculation among traders that accounts are participating in a value swap by selling names that have outperformed and buying names that remain undervalued. The BKX finished with all 24 names lower. The leaders were WFC, HBAN and NTRS, only off at least -2.28%. The laggards were BAC, RF, and ZION who were off at least -4.94%. The KRX finished the day with all 50 names lower. TCB, SIVB, and FMER were the leaders, while UMBF, COLB, and MBFI were the laggards. Among broader financials, JNS, LNC, and NYX were the worst performers, off at least -6.25%. The best performers were CBG, GNW, and ACE, off at least -0.07%. 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 -38.64% below its April 2010 high and -56.92% below its best level in September 2008.
NYSE Indicators. Volume fell -12.9% to 1.049 billion, from 1.157 billion shares Tuesday, 0.84x the 1.250 billion share 50-day moving average. Market breadth was negative, and up volume lagged down volume. Advancing stocks lagged decliners by -2,079 (compared to +1,401 the prior day), or 0.19:1. Up volume led down volume by 0.04:1.
SPX. On lower volume, the SPX fell -24.32 points, or -2.07%, to end at 1151.06. Volume fell -12.25% to 790.02 million shares, down from 900.33 million shares Tuesday and below the 982.56 million share 50-day moving average. For the 32nd straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1204.07 vs. 1281.05 respectively). The SPX closed above its 200-week moving average (1144.65) for the third straight session.
The SPX opened at 1178, marginally above the prior day’s close. By 9:55, the index climbed to 1184.71, setting the intra-day high. Through 10:45, the index retreated, turning negative at 10:15 and finding support at the 1170 level. A 11:30 rally returned the index to positive territory and to the 1180 at 11:55. Through 2:00, the index sold-off and reached 1160. Finding support at that level, the index climbed gradually through 3:15 when a stronger, closing bell sell-off took hold. The index fell through 1160 at 3:30 and 1155 by 3:40 to settle at 1150 by 3:45, where it traded flat through the bell and closed near the day’s low.
Technical indicators are neutral to negative. The market returned to correction after the September 21st and 22nd sessions’ losses in significantly higher volume. The SPX closed below 1300 for the 43rd straight session and below 1200 for the sixth straight session. The index closed below its April 2010 highs for the 38th time in the last 39 sessions. The 50-day moving average has been below the 100-day moving average since July 11th. The 100-day moving average crossed the 200-day average to the downside on September 7th. The SPX closed (by -2.36%) below its 20-day moving average (1178.93) for the sixth straight session. The index closed (by -4.40%) below its 50-day moving average for the 45th straight session. The index closed (by -8.51%) below its 100-day moving average (1258.10) for the 44th straight session. The SPX closed -10.15% below its 200-day moving average, closing below that average for the 40th straight session. All moving averages fell. The directional momentum indicator is negative for the 43rd straight session, and the trend is moderate and stable. Relative strength rose to 43.89 from 48.31, a neutral range. Next resistance is at 1173.71; next support is at 1139.40.
BKX. On lower volume, the KBW bank index fell -1.27 points, or -3.45%, to end at 35.56, its 40th close below the prior 52-week low of 42.70 from August 25, 2010 and its 37th straight sub-40 close. Volume fell -12.99% to 91.58 million shares, down from 105.26 million shares Tuesday, and below the 116.55 million share 50-day average. The BKX closed -17.26% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -38.64% and -36.08% below its April 23, 2010, and February 14, 2011 respective closes.
Financials underperformed the market, and regional banks underperformed large-cap banks. The BKX opened flat at 36.80 and set the intra-day high of 37.01 at 9:55. Through 11:04, the index sold-off to the 36.20 level, a -1.7% intra-day loss. The BKX rallied through noon and nearly retook the break-even line but retraced to 36.60 through 1:15. Through 2:00, the index fell back to 36.20, broke lower to 36.10, but quickly recovered back to the 36.20 level. A 3:00 rally took the index up 0.20 points in 10 minutes to 36.50, but that rally was sold strongly. Through the close, the index fell an additional -2.5% to close at the intra-day low.
Technical indicators are negative. Bank stocks are leading the market’s direction, currently in a downtrend. 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 (39.61) crossed below the 100- and 200-day moving averages (43.87 and 48.22, respectively) on April 25th and June 16th. The 20-day closed (by -2.45 points) below the 50-day for the 138th straight day, but the gap narrowed. The 50-day moving average closed (by -8.61 points) below the 200-day moving average for the 75th straight session, and the gap expanded. The 100-day moving average closed (by -4.35 points) below the 200-day moving average for the 53rd straight session, and the gap expanded. The BKX closed below its 20-, 50-, 100-, and 200-day moving averages for the 7th, 57th, 58th, and 83rd consecutive sessions, respectively. The index closed below 50.0 for the 83rd straight session and below 40.00 for the 37th straight session. The directional movement indicator is negative for the 46th straight session, and the trend is moderate and stable. Relative strength fell to 41.92 from 46.26, a neutral range. Next resistance is 36.54; next support at 35.06.