This morning. The U.S. equity markets are in a confirmed uptrend. This morning, equity futures are lower, but off their worst levels of the morning. A principal focus is the disposition of MF Global (MF, assets of $40 billion), currently halted after the New York Fed suspended new business with the firm. Overseas, Italian debt is under substantial pressure. The dollar is substantially stronger against other major currencies, to the point that the Japanese central bank authorities intervened. German Finance Minister Schäuble renewed a call to introduce a financial transactions tax to curb speculative trading. Otherwise, 3Q2011 earnings reports continue generally better than expected. Equity options markets suggest a neutral short-term outlook. Asian markets closed higher on much lower volume. Eurozone equities gapped lower and currently trade near their intraday lows. Commodities prices are lower. U.S. Treasury yields are lower. U.S. repo rates remain at low levels. Overnight and 3-month LIBOR remain elevated, near the year’s highs. Euribor-OIS spreads are near 2011 highs. After a fair value adjustment of +0.24 points, December SPX equity futures are at 1264.80, down -16.44 points. The SPX opens at 1285.09, -5.76% below its April 29 multi-year closing high, +6.65% above its 20-day and +8.33% above its 50-day moving averages. The SPX is +2.18% above its 1257.64 year-end close. Next resistance is at 1289.11; next support is at 1279.04.
Friday. Equity markets consolidated Thursday’s gains, as volume dropped back to below the 50-day moving average, and investors turned their focus on this week’s macro developments. The major indexes gapped modestly lower and traded lower through most of the day, but several times retraced to breakeven and ended mixed. The DJI and SPX closed +0.18% and +0.04% higher, while the Nasdaq and NYSE composite ended of -0.05% and -0.13%, respectively. Volatility continued to decline. Market breadth was slightly negative, though up volume led down volume by a small margin. Market segments were mixed, led by basic materials, oil and gas, and telecommunications, which gained at least +0.43%. Financials, utilities, and consumer services lagged with losses of at least -0.15%.
Commentary from trading desks reported that most of the trading activity pertained to earnings stories; also, that while shorts have largely covered, that “synthetic” shorts (i.e., large cash positions) still stand on the sidelines. Among the financials, credit cards (AXP, COF, DFS) companies outperformed, and individual regionals (RF, HBAN), processors (STT, BK), and insurers (NYSE:MET) had the better performance. Money center banks were mixed, with BAC posting gains, while C and JPM ended lower. Most other regional banks ended lower.
Distribution days number 2 on the SPX and NYSE composite, and 1 on the DJI and Nasdaq, since the uptrend commenced on October 4th.
In Asia, equity markets closed lower on lower volume. The Nikkei, Hang Seng, and Shanghai composite lost -0.69%, -0.77%, and -0.21%, respectively. Volume fell -18.8% in Japan; in Hong Kong and Shanghai, volume fell -53.3% and -23.6%, respectively. Commentary in Japan focused on a drop in earnings and currency intervention. In China, commentary focused on government statements that it will not ease policies regarding the property markets.
In Japan, the NKY closed at 8,988.39, its intraday low, compared to 9,050.47 the prior day. The NKY closed +3.09% above its 20-day moving average. The NKY gapped modestly lower, but reversed and rallied strongly at mid-day, trading to an intraday high of 9,152.39; unfortunately, the rally failed immediately and fell back to the 9,020 level through most of the afternoon. Selling pressure at the close took the index down to its intraday low. Of market segments, only consumer services rose, ending up +0.82%. Utilities and consumer goods were the other leaders, but ended off at least -0.03%. Financials telecommunications, and oil and gas were the laggards, down -1.72%.
In China, the Hang Seng Index closed at 19,864.87, down from 20,019.24 at the prior day’s close. The index moved higher at the open, to an intraday high of 20,155.60 in the first minutes, but reversed and traded lower to a 19,699.30 intraday low in early afternoon. The index trended higher through the day’s remainder, twice finding resistance at 19,900. The index closed +8.92% and +5.02% above its respective 20-day and 50-day moving averages. Only telecommunications closed up, with a gain of +0.27%. Other leaders were utilities, and oil and gas, which closed at least -0.14%. Financials lost -0.69%. Laggards were basic materials, technology, and consumer services, which ended off at least -1.99%.
In Shanghai, the SHCOMP closed at 2,468.25, down from 2,473.41 the prior day. The index opened lower, but rallied mid-morning to an intraday high of 2,478.31, before reversing again and falling back to an intraday low of 2,455.20 at mid-day. The index strengthened through the afternoon to end with a small loss. The SHCOMP closed +3.11% above its 20-day moving average, but -0.22% below its 50-day moving average. Market segments were mixed. Leaders were utilities, technology, and consumer services, which rose at least +0.53%. Laggards were financials, basic materials, and oil and gas, which lost at least -0.25%.
In Europe, equities gapped lower and lost further ground through mid-morning, but currently are off their worst intraday levels. Commentary suggests that markets continue to question aspects of last week’s sovereign debt agreements and particularly how the EFSF bailout facility will be funded. The Euro Stoxx 50, FTSE, and DAX are down -1.45%, -1.07%, and -1.53%, respectively. On the Euro Stoxx 50, the index traded to an intraday low of 2,411.36, but then rallied mildly back to 2,426.20. Among market segments, only health care is higher. Other leaders are telecommunications, and technology, at least -0.46% lower. Laggards are utilities, industrials, and financials, which are at least -1.20% lower.
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%, unchanged from Friday, but below the 0.25188% year-end level. USD 3-month LIBOR rose to 0.42944%, the highest level of the year, up from 0.42806% the prior day and compared to 0.30281% at year-end 2010.
- The US Libor-OIS (LOIS) spread rose to 34.5 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 79.4 bps, from 78.2 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 4.0 bps, unchanged from 4.0 bps Thursday and 3.0 bps Wednesday, but well off from a recent high of 33 bps on August 2nd.
- U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.277% and +2.250%, respectively, compared to 0.309% and 2.396%, Friday. The yield curve widened to +1.973%, compared to +2.087% 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.
- The U.S. dollar is stronger against the euro, pound, and yen. The dollar trades at US$75.899, compared to US$75.067 the prior day, and its US$76.599 50-day, US$75.646 100-day, and US$75.747 200-day averages. The euro trades at US$1.4014, compared to US$1.4147 Friday and US$1.4189 the day prior. The euro trades above its US$1.3841 50-day and US$1.4072 100-day averages. In Japan, the dollar trades at ¥77.91, compared to ¥75.82 Friday and ¥74.879 the prior day. The yen trades worse than its 50-day moving average ¥76.599.
- Commodities prices are lower, with lower, energy, metals, and aluminum, higher copper, and lower agriculture prices.
- The VIX ended at 24.53, down -3.65% from 25.46 at the prior close. The VIX is -25.6% below its 20-day moving average 32.97.
- The Euro Stoxx 50 volatility index (V2X) is up +7.60% to 33.61 from 31.24 the prior day. The V2X index trades -15.1% below its 39.58 20-day moving average, -36.2% below the 52.62 30-day high, and +18.8% above the 28.29 30-day low.
- The Hang Seng volatility index (VHSI) rose +0.66% to 32.10 from 31.89 the prior day. The VHSI index trades -12.4% below its 20-day moving average of 36.64.
- CBOE skew ended at 121.18, down -1.34% from 122.82 at the prior day’s close, but still 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 October Chicago Purchasing manager index at 9:45, and at 10:30, the Dallas Fed manufacturing activity report. This week, the FOMC hosts a two-day meeting, which concludes Wednesday afternoon with Bernanke’s press conference. Otherwise, the week’s focus will be on the Wednesday’s ADP employment report for October, Thursday’s latest weekly initial and continuing jobs claims, and Friday’s U.S. non-farm payrolls report for October.
Overseas news: Today, Italian 10-year yields surged +15 basis points to 6.18% while the spread over German bunds rose to a record of +409 basis points. In October, Eurozone inflation rose +3.0% over the prior year, above estimates for a +2.9% increase. Today, the Bank of Spain warned third quarter GDP may be flat and the country was at risk of missing its 2011 -6% budget deficit target. Today, Chinese Premier Wen refuted speculation the country will soon ease property controls. In October, Japan’s purchasing managers index rose +1.3 points to 50.6, but still less than August’s 52.2 reading. Today, Japanese Finance Minister Azumi intervened to weaken the yen, marking the third intervention this year.
Company news/ratings changes:
· MF – shares halted pending news of potential bankruptcy filing
3Q2011 Earnings. The third quarter’s earnings reports have surprised expectations. Of the 297 S&P500 companies that reported earnings to date, 74% (221 out of 297) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +5.8% (versus a historical average of +2%). EPS is up +18.9% over the prior year. Though challenged in the current operating environment, 82% of companies reported increased revenues over the prior year and 59% 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 of the 24 BKX members reporting, 75% beat operating estimates with aggregated results surprising by +14.3% and 63% have beat revenue estimates with aggregated surprising by +4.2%. EPS is up +21.2% over the prior year, while revenue is up +1.5%. In the third quarter of 2011, the BKX earned $1.24 per share, beating analysts’ estimate of $1.15 per share, and compared to $1.12 and $0.71 in 2Q11 and 3Q10, (an +11% and +48% 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 12.9x estimated 2011 earnings ($99.29) and 11.5x estimated 2012 earnings ($111.57), compared to 12.9x and 11.5 respective 2011-12 earnings Friday. 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 +17.1% and +31.6%, respectively.
Large-cap banks trade at a median 1.27x tangible book value, and 11.8x and 9.7x 2011 and 2012 consensus earnings, respectively, compared to 1.25x tangible book value and 11.8x/9.9x 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 +30.1% and +53.8%, respectively.
Options. Options markets are neutral. Composite options markets are neutral, index options markets are neutral, and equity options markets are bearish. The composite put/call ratio closed at 0.98, compared to 0.90 the prior day and below its 5- and 10-period moving averages of 0.95 and 1.04, respectively. The index put/call ratio closed at 1.28, compared to 1.28 the prior day and above the 5- and 10-period moving averages of 1.40 and 1.47, respectively. The equity put/call ratio closed the day at 0.55, compared to 0.52 the prior day and below its 5- and 10-period moving averages of 0.62 and 0.64, respectively.
SPX. On lower volume, the SPX rose +0.50, or +0.04%, to end at 1285.09, the highest close since August 1st. Volume fell -27.10% to 773.69 million shares, down from 1.061 billion shares Thursday and below the 882.46 million share 50-day moving average. For the 55th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1186.30 vs. 1274.25 respectively). The SPX closed above its 200-week moving average (1139.39) for the 16th straight session.
From its prior close at 1284.59, the SPX gapped lower at the open to 1278 and fell to its intra-day low of 1277.01 at 9:55. Through 11:15, the index rallied to retake the break-even line and reach 1285. Momentum reversed, and by 12:30, the index retreated back to 1279. The index again made a rally attempt to break-even, reaching that level by 1:30, but the rally lost momentum at the break-even line. Through 3:40, the market traded sideways at 1282 before a closing bell rally lifted the index to its intra-day high of 1287.08 at 3:50. The index fell into the close but still managed to finish with a marginal gain.
Technical indicators are turning neutral, from negative. The market returned to a confirmed uptrend following the October 12th follow-through confirmation of the October 4th positive reversal. The SPX closed below 1300 for the 65th straight session but above 1200 for the 13th straight session. The index closed above its April 2010 highs for the eighth time in the previous 11 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 +6.65%) above its 20-day moving average (1204.91) for the 16th time in 15 sessions. The index closed (by +8.33%) above its 50-day moving average for the 14th straight session. The index closed (by +4.43%) above its 100-day moving average (1230.58) for the fifth time in the last six sessions. The SPX closed +0.85%above its 200-day moving average, closing above that average for the second straight session. The 20-, 50-, and 100-day moving averages rose. The directional momentum indicator is positive for the 12th straight session, and the trend is moderate and increasing. Relative strength rose to 65.19 from 65.12, the higher end of a neutral range. Next resistance is at 1289.11; next support is at 1279.04.
BKX. On lower volume, the KBW bank index fell -0.15 points, or -0.36%, to end at 41.82, recording its 61st close below the prior 52-week low of 42.70 from August 25, 2010 but its second straight close above 40 since August 5th. Volume fell -42.95% to 90.91 million shares, down from 159.34 million shares Thursday and below the 112.56 million share 50-day average. The BKX closed -2.70% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -27.83% and -24.82% below its April 23, 2010, and February 14, 2011 respective closes.
Financials underperformed the market, and regional banks underperformed large-cap banks. From its prior close at 41.97, the BKX gapped lower at the open to 41.50 and fell to its intra-day low of 41.21 at 10:05. Through 11:15, the index rallied, retaking the break-even line at 11:05 and setting the intra-day high of 42.10 at 11:15. The index quickly returned into negative territory, where it would remain through the day, and retraced to the 41.60 level. The BKX traded mostly sideways through 3:30, but followed the broader market higher on a closing bell rally. The index failed to retake its break-even at that rally’s peak, and closed with a small loss.
Technical indicators are negative, but are improving rapidly. Bank stocks are leading the market’s uptrend. For 13 consecutive trading days, the BKX has closed above its 50-day moving average since October 12th, a level which had provided meaningful resistance since February 22nd. Moving averages continue to align bearishly, as shorter duration averages are below the longer duration averages, though all gaps are narrowing and some averages are rising. The 50-day average (37.49) crossed below the 100- and 200-day moving averages (41.36 and 46.60, respectively) on April 25th and June 16th. The 20-day closed (by +0.47 points) above the 50-day for the third straight session, and the gap expanded. The 50-day moving average closed (by -9.11 points) below the 200-day moving average for the 97th straight session, but the gap narrowed. The 100-day moving average closed (by -5.24 points) below the 200-day moving average for the 75th straight session, but the gap narrowed. The BKX closed above its 20-day moving average for the 16th time in the previous 17 sessions, above its 50-day moving average for the 13th time in 14 sessions, and above the 100-day moving average for the second straight session. The BKX closed below its 200-day moving averages for the 105th consecutive session. The index closed below 50.0 for the 105th straight session. The directional movement indicator is positive for the 10th straight session, and the trend is weak and increasing. Relative strength fell to 61.86 from 62.46, a neutral range. Next resistance is 42.21; next support at 41.32.