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U.S. Futures Sag After Mixed October Jobs Report, Weaker German PMI

|Includes: AIG, Leucadia National Corporation (LUK)
This morning.   Despite the past two days’ strong equity gains, the U.S. equity market uptrend remains under pressure.  This morning, equity futures are lower after a mixed October jobs report (lower than survey results, but strong revisions to August and September) that generally supported the view of a slowly accelerating U.S. economy. European sovereign debt remains a focus.  A Greek parliamentary confidence vote is expected sometime during the U.S. trading day.  Italian 10-year sovereign debt yields are higher today.  The dollar is slightly stronger, but off the day’s best levels. Otherwise, 3Q2011 earnings reports continue generally better than expected.  Equity options markets suggest a neutral short-term outlook.  Asian markets closed higher on mixed volume, with better strength in Japan and Hong Kong. Eurozone equities opened higher but are currently mixed and weakening. Commodities prices are mixed.  U.S. Treasury yields are slightly 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 +1.75 points, December SPX equity futures are at 1249.00, down -8.15 points.  The SPX opens at 1261.15, -7.51% below its April 29 multi-year 1363.61 closing high, +2.80% above its 20-day and +5.63% above its 50-day moving averages.  The SPX is +0.28% below its 1257.64 year-end close.  Next resistance is at 1271.30; next support is at 1242.90.
Thursday.  For a second consecutive day, U.S. equities posted strong gains, but on much stronger volume. Greece-related concerns again subsided, the ECB cut its benchmark rate, and U.S. economic reports generally surprised positively. The Nasdaq posted the best +2.20% gain, followed by the NYSE composite, SPX, and DJI, which gained +1.93%, +1.88%, and +1.76%, respectively.  Markets opened higher, but sold off after a credit downgrade of investment bank Jeffries Group (JEF). In the context of the recent MF failure, all financial shares sold off sharply, and JEF was twice halted for “circuit breaker” moves in excess of limits, both on the way down and again on the way back up. From 1,237.90, the SPX traded to 1250 at the open, but fell back to an intraday low of 1234.81 just after 10:00, when JEF issued a statement taking issue with the downgrade. The statement seemed to satisfy the markets, which moved quickly higher and trended better through the day to end just short of intraday highs. Volatility fell sharply.  Market breadth was positive, and up volume led down volume, both by large margins.  All market segments closed at least +1.16% higher. Leaders were oil and gas, technology, and industrials, which gained at least +2.41%. Financials gained +1.88%, but performance was hurt by the early drama. Laggards were consumer services, health care, and utilities.
Trading desk commentary focused Eurozone developments and noted the ongoing market nervousness, evident both in a huge overnight swing in equity futures and the effect of the JEF drama in early trading. Despite the increase in volumes, buyers remain unaggressive, though short sellers are as well. Focus is primarily macro, with talk of possible precautionary IMF credit lines to Spain and Italy, a possible parliamentary confidence vote in Italy, and opacity on most aspects of Greece.

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, equity markets closed higher on mixed volume. In Japan, the Nikkei reopened after yesterday’s holiday, and rose +1.86%. Volume declined -3.91%. In China, the Hang Seng and Shanghai composite climbed +3.12% and +0.81%, respectively. Volume rose +5.56% in Hong Kong, but declined -25.4% in Shanghai. Commentary focused Greece and  ECB rate cut surprise.
In Japan, the NKY closed at 8,801.40, up from 8,640.42 at the prior close. The NKY close +0.50% above its 20-day moving average, but it is down -14.0% for the year. The NKY gapped to 8,750 at the open and traded within a narrow ±25 point range through mid-day, when a rally pushed the index to an intraday high of 8,814.71 minutes before the close. Most segments gained. Leaders were telecommunications, industrials, and financials, with gains of at least +2.78%. Oil and gas, consumer services, and utilities were the laggards.
In China, the Hang Seng Index closed at 19,842.79, up from 19,242.50 at the prior close.  The index also gapped higher to 19,900, but traded within a ±100 point range through the day, finding support at 19,800 and resistance at 19,775. The index ended +5.79% and +5.01% above its respective 20-day and 50-day moving averages.  All market segments closed higher.  Market segment leaders were oil and gas, basic materials, and financials, which gained at least +3.31%. Utilities, telecommunications, and consumer services lagged, but gained at least +1.20%.
In Shanghai, SHCOMP closed at 2,508.29, up from 2,508.09 at the prior close.  The index opened slightly higher, but traded within a narrow range through the day, between the intraday low of 2,512.90 mid-morning and an intraday high of 2,536.78 in mid-afternoon.  The SHCOMP closed +4.78% and +2.60% above its respective 20-day and 50-day moving averages.  All market segments gained at least +0.01%. Leaders were oil and gas, basic materials, and industrials, with gains of at least +0.85%. Health care, technology, and consumer services were the laggards.
In Europe, equities opened higher, but are presently mixed after comments from Merkel that the G-20 had failed to agree to increase IMF resources. Other commentary focuses on this evening’s parliamentary confidence vote in Greece. The Euro Stoxx 50 and FTSE are up +.16% and +0.76%, respectively, while the DAX has reversed early gains and is now of -0.32%.  On the Euro Stoxx 50, from the prior day’s 2,347.94 close, the index opened at 2,360 and rose to an intraday high of 2,370.38, but subsequently backed off to 2,351.62.  Market segments are mixed. Telecommunications and financials are at least +0.10% higher. Laggards are basic materials, utilities, and consumer goods, which are down at least -0.61%.
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 0.14111%, down from 0.14222% the prior day and below the 0.25188% year-end level.  USD 3-month LIBOR rose to 0.43500%, the highest of the year, up from 0.43306% the prior day and compared to 0.30281% at year-end 2010.
  • The US Libor-OIS (LOIS) spread eased to 34.6 bps from 35.0 bps the prior day and compares to 12.0 bps at the end of 2010.  Euribor-OIS eased to 88.9 bps from 97.8 bps the prior day, the year’s highest level, 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 6 bps, unchanged from 6.0 bps Thursday, 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 0.236% and 2.077%, respectively, compared to 0.238% and 2.073% Thursday.  The yield curve widened to +1.841%, compared to +1.835% 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 mixed, slightly weaker against the euro and yen, but slight stronger against the pound.  The dollar trades at US$76.756, compared to US$76.672 the prior day, and above its US$76.838 50-day, US$75.719 100-day, and US$75.729 200-day averages.  The euro trades at US$1.3831, compared to US$1.3823 Thursday and US$1.3747 the day prior.  The euro trades worse than its US$1.3785 50-day and US$1.4050 100-day averages.  In Japan, the dollar trades at ¥78.03, compared to ¥78.06 Thursday and ¥78.05 the prior day.  The yen trades worse than its 50-day moving average ¥76.879.
  • Commodities prices are mostly higher, higher energy, precious metals, aluminum and copper, and agriculture prices.
Volatility, Skew:
  • The VIX ended at 30.50, down -6.84% from 32.74 at the prior close.  The VIX is -2.72% below its 20-day moving average 31.35.
  • The Euro Stoxx 50 volatility index (V2X) is down -5.15% to 37.99 from 40.05 the prior day.  The V2X index trades -0.61% below its 38.23 20-day moving average, -27.7% below the 52.62 30-day high, and +34.6% above the 28.29 30-day low.
  • The Hang Seng volatility index (VHSI) fell -10.1% to 35.31 from 339.26 the prior day.  The VHSI index trades -0.07% below its 35.33 20-day moving average.
  • CBOE skew rose +0.19% to 124.19, from 123.95 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 U.S. non-farm payrolls report for October. Survey expects growth in nonfarm payrolls of +95K, private payrolls of +125K, and +2K manufacturing payrolls. Survey expects no change in September’s 9.1% unemployment rate.
The headline nonfarm payrolls rose +80K, below survey, but the prior month was revised to 158K from 103K. Private payrolls rose 104K, below survey, but prior month was revised to 191K from 137K. The unemployment rate improved to 9.0%.
Overseas news:  Today, Greek Prime Minister Papandreou faces a no confidence vote, with press reports indicating he will hand over power to a negotiated coalition government should he win (should he lose, new elections would be required immediately).  Today, the G-20 meeting concludes.  This week, according to press reports, Eurozone banks accelerated sales of peripheral European sovereign debt to de-risk their balance sheets.  In September, German factory orders unexpectedly fell by -4.3% from the prior month, marking the third straight monthly decline and missing estimates for a small increase.  In October, Germany’s purchasing managers index for services declined to 50.6, missing estimates for no change at 52.1.  In October, the Eurozone purchasing managers index fell to 46.5, below estimates of no change at 47.2 and marking the lowest level since June 2009. 
Company news/ratings changes:
·         AIG – reports 3Q11 operating EPS of -$1.60, missing estimates of -$0.27
3Q2011 Earnings.  The third quarter’s earnings reports have so far surprised expectations.  Of the 401 S&P500 companies that reported earnings to date, 73% (293 out of 401) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +4.3% (versus a historical average of +2%).  EPS is up +16.5% over the prior year.  Though challenged in the current operating environment, 81% 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 12.7x estimated 2011 earnings ($99.42) and 11.3x estimated 2012 earnings ($111.57), compared to 12.5x and 12.2 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 1.23x tangible book value, and 10.9x and 9.7x 2011 and 2012 consensus earnings, respectively, compared to 1.20x tangible book value and 10.8x/9.5x 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 to bearish.  The composite put/call ratio closed at 1.07, compared to 1.16 the prior day and in between its 5- and 10-period moving averages of 1.16 and 1.06, respectively.  The index put/call ratio closed at 1.49, compared to 1.71 the prior day and below the 5- and 10-period moving averages of 1.65 and 1.50, respectively.  The equity put/call ratio closed the day at 0.63, compared to 0.64 the prior day and below its 5- and 10-period moving averages of 0.69 and 0.65, respectively.
NYSE Indicators.  Volume rose +4.96% to 1.002 billion shares, from 957.34 million shares Wednesday, 0.90x the 1.115 billion share 50-day moving average.  Market breadth was positive, and up volume outpaced down volume.  Advancing stocks led decliners by 1,303 (compared to 1,998 the prior day), or 5.92:1.  Up volume led down volume by 6.43:1.
SPX. On higher volume, the SPX rose +23.25 points, or +1.88%, to end at 1261.15.  Volume rose 5.35% to 794.81 million shares, up from 752.31 million shares Wednesday 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 (1193.97 vs. 1273.35 respectively).   The SPX closed above its 200-week moving average (1138.64) for the 20th straight session. 
From its prior close at 1237.90, the SPX gapped higher at the open to 1250, but profit taking sent the index into negative territory by 10:00 and to the intra-day low of 1234.81 at 10:03.  The index staged a gradual rally through the close, meeting resistance at 1250 from 11:30 through 12:45, but breaking above that level to reach 1260 by 1:50.  The index set the intra-day high of 1263.21 at 3:52 and closed at the top 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 69th straight session but above 1200 for the 17th straight session.  The index closed above its April 2010 highs for the 8th time in the previous 9 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 +2.80%) above its 20-day moving average (1226.84) for the 20th time in 21 sessions.  The index closed (by +5.63%) above its 50-day moving average for the 18th straight session.  The index closed (by +2.61%) above its 100-day moving average (1229.08) for the sixth time in seven sessions.  The SPX closed -0.96% below its 200-day moving average, closing below that average for the fourth straight session.  The 20- and 50-day moving averages rose.  The directional momentum indicator switched back to positive for the first time in three sessions, and the trend is weak and declining.  Relative strength rose to 57.63 from 53.93, a neutral range.  Next resistance is at 1271.30; next support is at 1242.90.
BKX.  On higher volume, the KBW bank index rose +0.72 points, or +1.83%, to end at 40.10, recording its 65th close below the prior 52-week low of 42.70 from August 25, 2010 but above the 40-level for the fourth time in six sessions.  Volume rose +6.04% to 92.90 million shares, up from 87.61 million shares Wednesday and below the 109.68 million share 50-day average. The BKX closed -6.70% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -30.80% and -27.92% below its April 23, 2010, and February 14, 2011 respective closes.
Financials performed in-line with the market, and regional banks outperformed large-cap banks.  From its prior close at 39.38, the BKX gapped higher to the 40.00, but quickly reversed momentum.  By 9:50, the index turned negative and by 10:03, the index set its intra-day low of 38.68.  Financials were especially hit by a -20% sell-off in Jefferies on questions surrounding the company’s European sovereign debt exposure.  Jefferies was halted at 10:00, the company issued a clarifying statement, and the stock as well as the index rebounded.  Through the close, the BKX rallied fairly consistently.  The index turned positive at 11:25, hugged the break-even line through 12:45, and rose to an intra-day high of 40.30 at 3:30.  The index closed near the intra-day high.   
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 17th 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 (37.75) crossed below the 100- and 200-day moving averages (41.05 and 46.33, respectively) on April 25th and June 16th.  The 20-day closed (by +1.02 points) above the 50-day for the seventh straight session, and the gap expanded.  The 50-day moving average closed (by -8.58 points) below the 200-day moving average for the 101st straight session, but the gap narrowed.  The 100-day moving average closed (by -5.27 points) below the 200-day moving average for the 79th straight session, and the gap expanded.  The BKX closed above its 20-day moving average for the 18th time in the last 19 sessions.  The index closed above its 50-day moving average for the 17th time in 18 sessions.  The index closed below the 100-day moving average for the fourth straight session and below its 200-day moving averages for the 109th consecutive session.  The index closed below 50.0 for the 109th straight session but retook the 40.0 level for the first time in three sessions.  The directional movement indicator is positive, narrowly, for the 14th straight session, and the trend is weak and decreasing.  Relative strength rose to 54.67 from 52.60, a neutral range.  Next resistance is 40.71; next support at 39.09.