Summary: On the day, HTC gained +$557.7 thousand, or +1.69% after leverage adjustment. We outperformed the SPX, but underperformed the XLF, BKX, and KRX.
This morning. The U.S. equity market is in a confirmed uptrend, and the major indexes are at their best levels since early August. The DJI and Nasdaq are again positive in 2011. This morning, equity futures are modestly lower, having weakened after an earnings miss by 3-M (NYSE:MMM) and continued lack of clarity regarding Eurozone sovereign debt plans. Equity options markets suggest a neutral to bearish short-term outlook. Asian markets closed lower in Japan, but China again posted gains with greater strength in Shanghai than Hong Kong. Eurozone equities are mixed, with German equities providing the strongest result, anticipating a Eurozone plan this week that will shore up banks’ capital while protecting economies from a Greek default. The U.S. dollar is slightly stronger. Commodities prices are stronger. U.S. Treasury yields are moving higher. U.S. repo rates remain at low levels. 3-month LIBOR remains elevated, at the year’s high. Euribor-OIS spreads are also at 2011 highs. After a fair value adjustment of +3.04 points, December SPX equity futures are at 1243.10, down -7.04 points. The SPX opens at 1254.19, -8.02% below its April 29 multi-year closing high, +5.95% above its 20-day and +6.28% above its 50-day moving averages. The SPX is -0.27% below its 1257.64 year-end close. Next resistance is at 1260.92; next support is at 1243.09.
Monday. The major indexes added to last week’s gains, but volume fell to just 82% of the 50-day moving average. Commentary attributed the gains to stronger than expected 3Q2011 earnings, improving U.S. economic data, short-covering, and prospects of some short-term resolution of Eurozone sovereign debt concerns. The Nasdaq led with +2.35% gain, followed by the NYSE composite, SPX, and DJI, which added +1.57%, +1.29%, and +0.89%, respectively. Segments were mixed. Basic materials, financials, and technology were particularly strong, adding at least +1.99%. Consumer goods, utilities, and telecommunications lagged with losses of at least -0.19%.
Distribution days number 1 on the DJI, SPX, NYSE composite, and Nasdaq, since the uptrend commenced on October 4th.
In Asia, equity markets closed mixed, with moderate gains in China, on mixed volume. The Nikkei shed -0.92%, while the Hang Seng and Shanghai composite gained +1.05% and +1.66%, respectively. NKY volume rose +9.93%. Commentary focused on uncertainties ahead of the results of tomorrow’s Eurozone summit. HSI volume fell -2.56%. SHCOMP volume rose +27.5%. The gains capped the biggest 2-day gain since December. Commentary focused on better-than-expected 3Q2011 profits, easing concerns that a slowing economy and tight monetary policy would result in a decline in Chinese industrial and manufacturing profitability.
In Japan, the NKY closed at 8,762.31, compared to 8,843.98 the prior day. The NKY closed +1.18% above its 20-day moving average. The NKY opened higher, but quickly lost ground and trended lower through the day to a 8,755.38 intraday low just before the close. Most market segments closed lower. Oil and gas and telecommunications ended at least +0.05% higher. Financials, utilities, and health care lagged with losses of at least -1.25%.
In China, the Hang Seng Index gapped higher, but found resistance at the 18,900 level, failing three times before a late rally pushed the index to a 18,981.6 intraday high. The index closed at 18,968.20, compared to the 18,771.82 prior day close. Most market segments closed higher. Leaders were oil and gas, technology, and consumer goods, with gains of at least +1.97%. Financials added +0.87%. Consumer services, telecommunications, and utilities lagged.
In Shanghai, the SHCOMP closed at 2,409.67, up from 2,370.33 the prior day and rising for a 2nd consecutive day. The index opened without much conviction, trading sideways until a late morning surge reversed a small loss and built strong gains through the afternoon session. The intraday high was 2,414.05, in the final hour. The SHCOMP closed +0.47% above its 20-day moving average, but -2.93% below its 50-day moving average. All market segments closed higher. Leaders were technology, basic materials, and consumer services, with gains of at least +2.42%. Financials, oil and gas, and telecommunications lagged, but added at least +0.08%.
In Europe, equities are mixed and off earlier intraday highs, but with Germany equities posting the best results. Commentary also focuses on improving Chinese manufacturing outlook and perceived progress on developing a plan to address the European sovereign debt crisis. The Euro Stoxx 50, DAX, and FTSE are -0.03%, +0.15%, and +1.33%, respectively. The DAX has rallied 20% from early October lows. On the Euro Stoxx 50, market segments are mixed, led by basic materials, consumer goods, and technology, with gains of at least +0.21%. Financials are -0.04% lower. Telecommunications, health care, and consumer services lag with losses of at least -0.72%.
Libor, LOIS, Currencies, Treasuries, Commodities:
- Interbank lending rates continue to reflect substantial stress, centered on the health of Eurozone banks in the current economic environment. Overnight USD LIBOR is 0.14222%, up from 0.14167% Monday, but below the 0.25188% year-end level. USD 3-month LIBOR rose to 0.42222%, the highest level of the year, up from 0.42028% the prior day and compared to 0.30281% at year-end 2010.
- The US Libor-OIS (LOIS) spread rose to 34.3 bps, the highest level of the year, from 34.2 bps the prior day and compares to 12.0 bps at the end of 2010. Euribor-OIS rose to 77.5 bps, also the year’s high, from 76.6 bps the prior day, 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 2.0 bps, unchanged from 2.0 bps Monday and 1.0 bp Friday, but well off from a recent high of 33 bps on August 2nd.
- The U.S. dollar is mixed, slightly weaker against the euro and pound, but slightly better against the yen. The dollar trades at US$75.986, compared to US$76.028 the prior day, and its US$76.474 50-day, US$75.598 100-day, and US$75.805 200-day averages. The euro trades at US$1.3942, compared to US$1.3929 Monday and US$1.3896 the day prior. The euro trades below its US$1.3867 50-day and US$1.4088 100-day averages. In Japan, the dollar trades at ¥76.15, compared to ¥76.10 Monday and ¥76.29 the prior day. The yen trades better than its 50-day moving average ¥76.793.
- U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.288% and 2.262%, respectively, compared to 0.279% and 2.234% Monday. The yield curve narrowed to +1.974%, compared to +1.955% 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 higher, with higher energy, precious metals, copper and aluminum, and higher agriculture prices.
- The VIX ended at 29.26, down -6.58% from 31.32 at the prior close. The VIX is -17.34% below its 20-day moving average 35.40.
- The Euro Stoxx 50 volatility index (V2X) is down -4.45% to 35.67, compared to 37.31 the prior day. The V2X index trades -14.8% below its 20-day moving average of 41.87, -32.2% below the 56.34 30-day high, and +10.2% above the 34.17 30-day low.
- The Hang Seng volatility index (VHSI) fell -1.19% to 34.96 from 35.38 the prior day. The VHSI index trades -8.59% below its 20-day moving average of 38.25.
- CBOE skew ended at 124.85, down -1.84% from 127.19 at the prior day’s close, but still well above a neutral (115-120) range. The index tracks the cost of buying out-of-the-money, long-dated options. A rise implies that investors are paying more to buy puts, a bearish signal.
U.S. news and economic reporting. Today’s scheduled economic reports include the August CaseShiller home prices report at 9:00, followed by October consumer confidence and the Richmond Fed manufacturing index at 10:00. Tomorrow’s economic reports include September durable goods, capital goods, and new home sales. Thursday’s reports provide the first look at 3Q2011 GDP, inflation, and the latest week’s initial and continuing jobless claims.
Overseas news: Last evening, an Italian cabinet meeting broke up without conclusive action on the economic reforms demanded European Union partners last weekend, fueling speculation that Prime Minister Berlusconi’s government could fall. For November, the German GFK consumer confidence survey projects an increase in confidence compared to expectations for a decline.
Company news/ratings changes:
· RF – reports 3Q11 EPS of $0.08, beating estimates of $0.04
· SBNY – reports 3Q11 EPS of $0.83, beating estimates of $0.81
3Q2011 Earnings. The third quarter’s earnings reports have so far surprised expectations. Of the 120 S&P500 companies that reported earnings to date, 73% (88 out of 120) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +6.2% (versus a historical average of +2%). EPS is up +13.8% over the prior year. Though challenged in the current operating environment, 81% of companies reported increased revenues over the prior year and 64% 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 22 of the 24 BKX members reporting, 77% beat operating estimates with aggregated results surprising by +14.1% and 68% have beat revenue estimates with aggregated surprising by +4.3%. EPS is up +19.2% over the prior year, while revenue is up +1.5%. In the third quarter of 2011, analysts estimate the BKX will earn $1.15 per share, compared to $1.12 and $0.71 in 2Q11 and 3Q10, (a +17% and +84% increase, respectively). In the second quarter, 88% (21 of 24) beat earnings estimates on an operating basis. Revenues also exceeded expectations, with 79% of BKX members beating estimates.
Valuation. The SPX trades at 12.6x estimated 2011 earnings ($99.35) and 11.2x estimated 2012 earnings ($111.57), compared to 12.5x and 11.1 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 +5.0%, and +4.0%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.2% and +31.6%, respectively.
Large-cap banks trade at a median 1.21x tangible book value, and 10.7x and 9.6x 2011 and 2012 consensus earnings, respectively, compared to 1.20x tangible book value and 10.7x/9.2x 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 +28.8% and +53.8%, respectively.
Options. Options markets are neutral to bearish. Composite options markets are bearish, index options markets are neutral to bearish, and equity options markets are bearish. The composite put/call ratio closed at 0.95, compared to 0.85 the prior day and below its 5- and 10-period moving averages of 1.06 and 1.12, respectively. The index put/call ratio closed at 1.47, compared to 1.24 the prior day and above the 5- and 10-period moving averages of 1.50 and 1.57, respectively. The equity put/call ratio closed the day at 0.53, compared to 0.51 the prior day and below its 5- and 10-period moving averages of 0.63 and 0.66, respectively.
SPX. On lower volume, the SPX rose +15.94 points, or +1.29%, to end at 1254.19. Volume fell -32.48% to 702.20 million shares, down from Friday’s options expiration-inspired 1.040 billion shares and below the 888.76 million share 50-day moving average. For the 51st straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1180.12 vs. 1274.61 respectively). The SPX closed above its 200-week moving average (1139.24) for the 13th straight session.
From its prior close at 1238.25, the SPX opened flat, at the intra-day low, and with positive momentum. By 9:50, the index reached 1247 before retracing back to 1244 by 10:00. Through 11:50, the index rallied to the 1255 level, reaching resistance. Through the close, the market traded sideways between 1250 and 1256, setting the intra-day high on a small break up to 1256.55 at 1:50. The index closed at 1254, at the high end of the day’s range.
Technical indicators are negative but improving. The market returned to a confirmed uptrend following October 12th’s follow-through confirmation of October 4th’s strong reversal. The SPX closed below 1300 for the 61st straight session but above 1200 for the ninth straight session. The index closed above its April 2010 highs for the fourth time in the previous seven 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 +5.95%) above its 20-day moving average (1183.79) for the 12th time in 13 sessions. The index closed (by +6.28%) above its 50-day moving average for the 10th straight session. The index closed (by +1.83%) above its 100-day moving average (1231.68) for the second straight session. The SPX closed -1.60% below its 200-day moving average, closing below that average for the 58th straight session. The 20- and 50-day moving averages rose. The directional momentum indicator is positive for the ninth straight session, and the trend is weak and stable. Relative strength rose to 62.67 from 60.14, the higher end of a neutral range. Next resistance is at 1260.92; next support is at 1243.09.
BKX. On lower volume, the KBW bank index rose +1.14 points, or +2.93%, to end at 40.05, its 57th close below the prior 52-week low of 42.70 from August 25, 2010 but its first close above 40 since August 5th (55 sessions). Volume fell -42.43% to 93.81 million shares, down from 162.94 million shares Friday and below the 111.19 million share 50-day average. The BKX closed -6.82% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -30.89% and -28.01% below its April 23, 2010, and February 14, 2011 respective closes.
Financials outperformed the market, and large-cap banks outperformed regional banks. The BKX opened higher to 39.00 and set the intra-day low. Through 2:00, the index staged a durable rally briefly interrupted by occasional and light retraces. The index breached 40.00 at 11:50 and reached the intra-day high of 40.26 at 2:00. Gains retraced back to 39.80 by 3:30, but rallied in trading’s final 30 minutes to close above 40.0.
Technical indicators are mostly negative, but are improving. Bank stocks are leading the market’s direction, which switched to an uptrend after October 13’s confirmation of October 4th’s strong reversal. 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, but the index has now recorded its ninth close above that level since October 12th. Moving averages align bearishly, as the shorter duration averages are below the longer duration averages, although some gaps are narrowing or holding and some averages are rising. The 50-day average (37.31) crossed below the 100- and 200-day moving averages (41.61 and 46.87, respectively) on April 25th and June 16th. The 20-day closed (by -0.23 points) below the 50-day for the 156th straight day, but the gap narrowed. The 50-day moving average closed (by -9.56 points) below the 200-day moving average for the 93rd straight session, and the gap narrowed. The 100-day moving average closed (by -5.26 points) below the 200-day moving average for the 71st straight session, and the gap expanded. The BKX closed above its 20-day moving average for the 12th time in the previous 13 sessions and above its 50-day moving average for the ninth time in 10 sessions. The BKX closed below its 100- and 200-day moving averages for the 76th and 101st consecutive sessions, respectively. The index closed below 50.0 for the 101st straight session but above 40.00 for the first time in 55 sessions. The directional movement indicator is positive for the sixth straight session, and the trend is weak and stable. Relative strength rose to 58.47 from 55.14, a neutral range. Next resistance is 40.54; next support at 39.28.