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Futures Strengthen As Greek Fears Subside, ECB Surprise Rate Cut

|Includes: Hartford Financial Services Group Inc. (HIG), NLY, WFC
This morning.   Despite yesterday’s strong equity gains, the U.S. equity market uptrend remains under pressure.  This morning, equity futures are higher and at their best levels of the morning, after having reversed large losses overnight.  Futures strengthened further after news at 8:45 that the ECB unexpectedly cut its benchmark interest rate. European sovereign debt remains a focus, where the G-20 leaders are meeting over the next two days. Speculation is rife that the Greek prime minister will step down prior to tomorrow’s parliamentary confidence vote. Italian 10-year debt hit a new high overnight, but has rallied as European equity markets reversed earlier steep losses. The dollar strengthened overnight, but subsequently weakened. The ECB rate cut somewhat strengthened the dollar, but its still trades lower. Otherwise, 3Q2011 earnings reports continue generally better than expected.  Equity options markets suggest a neutral short-term outlook.  Asian markets closed mixed on increased volume, with better strength in Shanghai. Japanese equity markets were closed for holiday. Eurozone equities gapped substantially lower, but rallied and have reversed positively to moderate gains. Commodities prices are mixed.  U.S. Treasury yields are higher.  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 -0.20 points, December SPX equity futures are at 1249.80, up +16.00 points.  The SPX opens at 1237.90, -9.22% below its April 29 multi-year closing high, +1.30% above its 20-day and +3.82% above its 50-day moving averages.  The SPX is -1.57% below its 1257.64 year-end close.  Next resistance is at 1247.05; next support is at 1224.19.
Wednesday.  U.S. equities rebounded and recovered about half the prior two days’ losses. Volumes fell.  Greece-related concerns subsided on somewhat improved U.S. economic reports and dovish FOMC statements released mid-day. The NYSE composite gained +1.69%, followed by SPX, DJI, and Nasdaq gains of +1.61%, +1.53%, and +1.27%, respectively. Most of the day’s gains occurred at the open. Compared to the prior 1,218.28 close, the SPX opened at 1,233, and rose to a mid-morning intraday high of 1,242.48. Indexes weakened prior to Bernanke’s 2:15 press conference, then strengthened through the close. Volatility fell sharply at the open, then traded sideways through the day.  Market breadth was positive, and up volume led down volume, both by large margins.  All market segments were higher. Financials led with a +3.77% gain, followed by utilities, and industrials, with gains of at least +2.70%. Technology, consumer goods, and health care lagged, but gained at least +0.84%.
Trading desk commentary focused Eurozone developments and the FOMC. Trading was busiest at the open. Shorting activity was subdued. Cash remains sidelined.

Distribution days number 4 on the SPX and NYSE composite, and 3 on the DJI and Nasdaq, since the uptrend commenced on October 4th.
In Asia, Japanese equity markets were closed.  In China, equity markets closed mixed, with the Hang Seng closing off -2.49% while the Shanghai composite closed up +0.16%. Volumes rose +9.18% and +29.6%, respectively. Commentary focused Eurozone developments, weak Hong Kong residential property sales, and speculation that Chinese monetary policy would be eased.
In Japan, the NKY stands at 8,640.42, -1.23% below its 20-day moving average and down -15.5% for the year.
In China, the Hang Seng Index closed at 19,242.50, down from 19,733.71 at the prior close.  The index gapped lower to open at 19,400 and traded lower to 19,200 by mid-morning. The index rallied back to an intraday high of 19,541.10 at mid-day, but the market weakened through the afternoon, trading to an intraday low of 19,142.30 before improving slightly at the close. The index ended +3.16% and +1.81% above its respective 20-day and 50-day moving averages.  All market segments closed lower. Market segment leaders were utilities, telecommunications, and financials, but ended at least -1.76% lower. Laggards were consumer goods, oil and gas, and consumer services closed down at least -3.51%.
In Shanghai, the SHCOMP closed at 2,508.09, up from 2,504.11 at the prior close.  The index opened slightly higher and strengthened through the morning session to an intraday high of 2,535.24 just before mid-day. The index trended lower through the afternoon, giving back most of the day’s gains. The SHCOMP closed +4.25% and +1.71% above its respective 20-day and 50-day moving averages.  Market segments were mixed. Leaders were health care, technology, and basic materials, with gains of at least +0.68%. Laggards were financials, telecommunications, and utilities, with losses of at least -0.21%.
In Europe, equities gapped more than -3.0% lower, but immediately rallied to a positive reversal of more than 1% at midday. Commentary focuses on Greece’s schedule December 4th referendum, which is now recast as a decision either to “stay or go” in the Euro. The other focus is the G-20 agenda, which is dominated by the current Eurozone mess. The Euro Stoxx 50, FTSE, and DAX are +1.38%, +0.34% and +1.75% higher, respectively.  On the Euro Stoxx 50, from the prior day’s 2,291.89 close, the index opened at 2,240, but subsequently rallied to a 2,335.05 intraday high. The index is currently at 2,321.10. All market segments are at least +0.26% higher. Leaders are utilities, financials, and consumer services, with gains of at least +1.42%. Technology, consumer goods, and health care are the laggards. 
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 since October 25th, and below the 0.25188% year-end level.  USD 3-month LIBOR rose to 0.43306%, the highest of the year, up from 0.43167% the prior day and compared to 0.30281% at year-end 2010.
  • The US Libor-OIS (LOIS) spread eased to 34.6 bps from 34.9 bps the prior day and compares to 12.0 bps at the end of 2010.  Euribor-OIS rose to 87.4 bps, the year’s highest level, from 86.8 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 12.0 bps, unchanged from 12.0 bps Wednesday, and well off from a recent high of 33 bps on August 2nd.
  • U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.230% and 2.006%, respectively, compared to 0.226% and 1.985% Wednesday.  The yield curve widened to +1.776%, compared to +1.759% the prior day.  In the past year, the 2- and 10-year spread 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 somewhat weaker against the euro, pound, and yen.  The dollar trades at US$76.858, compared to US$77.017 the prior day, and above its US$76.783 50-day, US$75.704 100-day, and US$75.736 200-day averages.  The euro trades at US$1.3781, compared to US$1.3747 Wednesday and US$1.3703 the day prior.  The euro trades worse than its US$1.3798 50-day and US$1.4054 100-day averages.  In Japan, the dollar trades at ¥78.00, compared to ¥78.05 Wednesday and ¥78.37 the prior day.  The yen trades worse than its 50-day moving average ¥76.850.
  • Commodities prices are mixed, with higher energy, lower precious metals, higher aluminum and copper, and higher agriculture prices.
Volatility, Skew:
  • The VIX ended at 32.74, down -5.84% from 34.77 at the prior close.  The VIX is +3.47% above its 20-day moving average 31.64.
  • The Euro Stoxx 50 volatility index (V2X) is down -1.10% to 41.69 from 42.14 the prior day.  The V2X index trades +8.70% above its 38.36 20-day moving average, -20.6% below the 52.62 30-day high, and +47.7% above the 28.29 30-day low.
  • The Hang Seng volatility index (VHSI) rose +11.6% to 39.26 from 35.17 the prior day.  The VHSI index trades +10.7% below its 35.47 20-day moving average.
  • CBOE skew fell to -2.13% to 123.95, from 126.65 at the prior day’s close, and 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, at 8:30, the latest weekly initial and continuing jobs claims and 3Q2011 preliminary nonfarm productivity. Non-farm productivity rose +3.1%, slightly better than survey, on a -2.4% decline in unit labor costs. Initial jobless claims were 397K, compared to 400K survey and 406K revised prior. The ISM non-manufacturing composite will be release at 10:00. Tomorrow’s focus is the U.S. non-farm payrolls report for October.
Overseas news: In Mario Draghi’s first meeting as president, the ECB unexpectedly cut its benchmark by 25 bps to 1.25%. Also, there are conflicting press reports out of Greece suggest Prime Minister Papandreou may or may not step down imminently, and the referendum will or may not proceed.   Overnight, Greek Finance Minister Venizelos expressed direct opposition to the referendum initiative.  Last evening, the Italian cabinet failed to strike a deal on structural reforms, a key milestone promised by Prime Minister Berlusconi in advance of this week’s G-20 meeting.  Press reports indicate Italian political opposition parties may try to force Berlusconi out of office next week.  Today, Spain sold €4.49 billion of 3- and 5-year bonds, the high end of the targeted range and at yields mostly consistent with current market rates.
Company news/ratings changes:
·         HIG – reports 3Q11 core EPS of $0.05, missing estimates of $0.24
·         WFC – under contract to purchase 61 performing U.S. based commercial real estate loans from the Irish Bank Resolution Corporation for $3.3 billion
·         NLY – upgraded to outperform at Wells Fargo, $18 price target
3Q2011 Earnings.  The third quarter’s earnings reports have surpassed expectations.  Of the 367 S&P500 companies that reported earnings to date, 73% (269 out of 367) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +5.6% (versus a historical average of +2%).  EPS is up +18.5% over the prior year.  Though challenged in the current operating environment, 82% of companies reported increased revenues over the prior year and 57% 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 12.5x estimated 2011 earnings ($99.42) and 11.1x estimated 2012 earnings ($111.57), compared to 12.3x and 10.9 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 +4.0%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +17.3% and +31.6%, respectively. 
Large-cap banks trade at a median 1.20x tangible book value, and 10.8x and 9.5x 2011 and 2012 consensus earnings, respectively, compared to 1.18x tangible book value and 10.4x/9.2x 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 +29.6% and +53.8%, respectively.
Options.  Options markets are neutral.  Composite options markets are neutral, index options markets are neutral, and equity options markets are neutral.  The composite put/call ratio closed at 1.16, compared to 1.35 the prior day and above its 5- and 10-period moving averages of 1.13 and 1.09, respectively.  The index put/call ratio closed at 1.71, compared to 1.71 the prior day and above the 5- and 10-period moving averages of 1.61 and 1.54, respectively.  The equity put/call ratio closed the day at 0.64, compared to 0.87 the prior day and above its 5- and 10-period moving averages of 0.67 and 0.66, respectively.   
NYSE Indicators.  Volume fell -28.0% to 957.34 million shares, from 1.329 billion shares Tuesday, 0.86x the 1.117 billion share 50-day moving average.  Market breadth was positive, and up volume outpaced down volume.  Advancing stocks led decliners by 1,998 (compared to -2,153 the prior day), or 4.97:1.  Up volume led down volume by 8.72:1.

SPX. On lower volume, the SPX rose +19.62 points, or +1.61%, to end at 1237.90.  Volume fell -24.82% to 752.31 million shares, down from 1.001 billion shares Tuesday and below the 871.76 million share 50-day moving average. For the 58th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1192.29 vs. 1273.44 respectively)The SPX closed above its 200-week moving average (1138.52) for the 19th straight session. 
From its prior close at 1218.28, the SPX gapped higher at the open to 1232 and rose to 1237 by 9:35.  Through 10:00, gains retraced back to the 1232 level before a rally took the index to the intra-day high of 1242.48 at 11:20.  The index drifted lower into the Federal Reserve’s 12:30 rate announcement, retracing to the 1235 level.  The announcement was sold, and the index fell to 1227.02 at 1:20, setting the intra-day low.  The index rallied during Chairman Bernanke’s press conference, and retook the 1240 level at 3:20.  The SPX fluctuated into the close between 1240 and 1235, and closed in the middle of that range but towards the higher end of the day’s range. 
Technical indicators are turning neutral.  The market returned to a confirmed uptrend following October 12th’s follow-through confirmation of October 4th’s strong reversal, though this week’s declines placed that uptrend under pressure.  The SPX closed below 1300 for the 68th straight session but above 1200 for the 16th straight session.  The index closed above its April 2010 highs for the 7th time in the previous 8 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 7thThe SPX closed (by +1.30%) above its 20-day moving average (1222.03) for the 19th time in 20 sessions.  The index closed (by +3.82%) above its 50-day moving average for the 17th straight session.  The index closed (by +0.73%) above its 100-day moving average (1229.35) for the fifth time in six sessions.  The SPX closed -2.79% below its 200-day moving average, closing below that average for the third straight sessions.  The 20- and 50-day moving averages rose.  The directional momentum indicator is negative for the second straight session, and the trend is moderate and declining.  Relative strength rose to 53.93 from 50.54, a neutral range.  Next resistance is at 1247.05; next support is at 1224.19.
BKX.  On lower volume, the KBW bank index rose +1.25 points, or +3.28%, to end at 39.38, recording its 64th close below the prior 52-week low of 42.70 from August 25, 2010 and remaining below 40 for the second straight session.  Volume fell -34.55% to 87.61 million shares, down from 133.86 million shares Tuesday and below the 110.53 million share 50-day average. The BKX closed -8.38% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -32.04% and -29.21% below its April 23, 2010, and February 14, 2011 respective closes.
Financials were the market’s best performing segment, and regional banks outperformed large-cap banks.  From its prior close at 38.13, the BKX gapped higher to the 39.05 level and quickly rose to 39.22 by 9:35.  By 10:00, gains retraced back to 38.83 before a rally lifted the index to the intra-day high of 39.54 at 11:20.  Like the broader market, banks sold off slightly into the Fed’s interest rate announcement, and losses accelerated following the release.  By 1:25, the index reached 38.77, setting the intra-day low.  Banks rallied during Chairman Bernanke’s press conference, and the BKX nearly retook the intra-day high, reaching 39.53 at 3:20.  The index fluctuated into the close but finished at the top end of the day’s range. 
Technical indicators are negative, but are improvingBank stocks are leading the market’s direction, which switched to an uptrend after October 13’s confirmation of October 4th’s strong reversal.  However, this week’s sharp losses in the markets, and in banks particularly, have placed that uptrend under pressure.  The BKX has now recorded its 16th close above the 50-day moving average since October 12th, a level which provided meaningful resistance since February 22nd.  Moving averages align bearishly, as most shorter duration averages are below the longer duration averages, although most major gaps are narrowing and some averages are rising.  The 50-day average (37.70) crossed below the 100- and 200-day moving averages (41.13 and 46.39, respectively) on April 25th and June 16th.  The 20-day closed (by +0.92 points) above the 50-day for the sixth straight session, and the gap expanded.  The 50-day moving average closed (by -8.69 points) below the 200-day moving average for the 100th straight session, but the gap narrowed.  The 100-day moving average closed (by -5.26 points) below the 200-day moving average for the 78th straight session, and the gap expanded.  The BKX closed above its 20-day moving average for the 17th time in the last 18 sessions.  The index closed above its 50-day moving average for the 16th time in 17 sessions.  The index closed below the 100-day moving average for the third straight session and below its 200-day moving averages for the 108th consecutive session.  The index closed below 50.0 for the 108th straight session and remained below 40.0 for the second straight session.  The directional movement indicator is positive, narrowly, for the 13th straight session, and the trend is moderate and decreasing.  Relative strength rose to 52.60 from 48.83, a neutral range.  Next resistance is 40.03; next support at 38.39.