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U.S. Futures Slightly Lower, Though Japanese Economy Expands, Italian Debt Sale Disappoints

|Includes: Bank of America Corporation (BAC), NLY
This morning.   U.S. equity futures are modestly lower, but off the morning’s lows.  For a 2nd consecutive day, Asian equity markets rebounded strongly on a better than expected Japanese preliminary 3Q2011 GDP report, which resumption of economic growth at a +6.0% rate, compared to 2Q2011 contraction of -1.3%. After a poorly received Italian 5-year bond auction, European markets are moderately lower, but off their worst intraday levels. The dollar has strengthened on the day, and the euro weakened after the Italian bond auction news. U.S. equity options markets suggest a neutral to bearish short-term outlook.   Commodities prices are mixed.  U.S. Treasury yields are slightly higher at the long end of the curve, compared to Thursday’s pre-holiday mark. U.S. repo rates are at low levels.  Overnight and 3-month LIBOR remain elevated, at the year’s highs.  Euribor-OIS spreads are near 2011 highs.  After a fair value adjustment of -0.40 points, December SPX equity futures are at 1256.70, down -4.30 points.  The SPX opens at 1263.69, -7.23% below its April 29 multi-year 1363.61 closing high, +1.60% below its 20-day and +5.25% above its 50-day moving averages.  The SPX is +0.49% above its 1257.64 year-end close.  Next resistance is at 1273.85; next support is at 1246.99.
Friday.  U.S. equity markets extended their recovery after Wednesday’s losses, with all major indexes adding at least +1.95%, though volume was an unimpressive 0.70x the 50-day moving average. The DJI added +2.19%, followed by the Nasdaq, NYSE composite, and SPX, which gained +2.18%, +2.05%, and +1.95%, respectively. All market segments closed higher.  Consumer services, industrials, and basic materials led with gains of +2.36%. Utilities, consumer goods, and telecommunications lagged, but gained at least +0.99%.
Equity markets probably benefited that bond markets were closed for the Veterans’ day holiday, but equities gapped higher and after a stronger than expected consumer confidence report at 10:00, added to gains through the morning, and then drifted through the afternoon into the close. From the prior close of 1239.69, the SPX gapped up to 1255 and strengthened to a mid-morning intraday high of 1266.98. Activity eased through the afternoon, but without much effect on equity prices.
Trading desk commentary again noted the relatively quiet trading activity. Most activity came from hedge funds.  One notable development was the purchase of 500,000 and 450,000 put options on the financials XLF December $11 and $13 contracts, respectively, equal to 139% and 335% of the open interest.

Distribution days number 5 on the SPX and NYSE composite, and 4 on the DJI and Nasdaq, since the uptrend commenced on October 4th.
In Asia, equity markets closed with moderate gains, on mixed volume. In Japan, the Nikkei rose +1.05%.  Volume fell -16.8%.  The Hang Seng rose +1.94%, on a +31.3% increase in volume.  HSI volatility fell -6.02%.  The Shanghai composite rose +1.92%, on a +21.8% increase in volume.  In Japan, commentary focused on a +6.0% resumption of economic growth, after a -2.1% contraction in 3Q2011. In China, traders cited new governments in Greece and Italy and growing consensus that China’s economic managers will achieve a “soft landing”.
In Japan, the NKY closed at 8,603.70, up from 8,514.47 at the prior close.  The NKY closed -1.84% below its 20-day moving average and down -15.9% for the year.  The NKY gapped higher traded to an intraday high of 8,655.31 within the first minutes. The index traded sideways through the rest of the morning, but weakened just before noon and traded lower to the 8,595.43 intraday low at mid-day, finding support at 8,600 through the rest of the session. Most segments closed higher. Leaders were industrials, health care, and consumer goods, which gained at least +1.09%. Financials added +0.91%. Laggards were consumer services, utilities, and telecommunications. 
In China, the Hang Seng Index closed at 19,508.18, up from 19,137.17 at the prior close.  The index gapped higher to open at 19,600.00, which proved tough a tough resistance level through the day. The index rallied to an intraday high of 19,640.70 in mid-morning, but selling pressure in early afternoon and late in the session pulled the index back to the 19,500 level late in the day. The index ended +1.79% and +3.39% above its respective 20-day and 50-day moving averages.  All market segments closed at least +0.39% higher, led by basic materials, consumer goods, and financials, which added at least +2.05%. Telecommunications, industrials, and utilities lagged, but gained at least +0.39%.
In Shanghai, SHCOMP closed at 2,528.71, up from 2,481.08 at the prior close.  The index opened at 2,498.67, and after some initial hesitation rallied strongly through the morning to a mid-day intraday high of 2,529.63. The SHCOMP closed +3.33% and +2.87% above its respective 20-day and 50-day moving averages.  All market segments close higher. Telecommunications, basic materials, and utilities closed at least +2.37% higher.  Industrials, financials, and oil and gas lagged with gains of at least +1.02%. 
In Europe, equities opened higher, but sold off after the poorly received Italian debt auction. Selling pressure has taken equities to moderate mid-day losses. Commentary has focused on the bond auction (yields were 6.29%) and the change of government in Italy, where economist Mario Monte will attempt to form a new government. The euro has weakened against the dollar.  The Euro Stoxx 50, FTSE, and DAX are down -1.65%, -0.66%, and -1.34%, respectively.  Compared to the prior day’s 2,284.31 close, the EuroStoxx50 trades at 2,293.28, compared to the 2,281.86 intraday low.  All market segments are at least -0.84% lower.  Leaders are heath care, consumer services, and oil and gas, which are down at least -1.21% lower.  Consumer goods, financials, and utilities lag with losses of at least -1.75% higher.  Health care is down -0.02%.
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.   USD LIBOR is 0.14222%, up from  0.14111% Thursday and below the 0.25188% year-end level.  USD 3-month LIBOR rose to 0.46056%, the highest of the year, up from 0.45722% the prior day and compared to 0.30281% at year-end 2010.
  • The US Libor-OIS (LOIS) spread rose to 37.3 bps, the highest level of the year, up from 37.1 bps Friday and compares to 12.0 bps at the end of 2010.  Euribor-OIS eased to 88.4 bps, down from 89.9 bps Friday, 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 7.0 bps, unchanged from 7.0 bps Friday, and well off from a recent high of 33 bps on August 2nd.
  • U.S. Treasury yields slightly higher, with 2- and 10-year maturities yielding 0.230% and 2.070%, respectively, compared to 0.230% and 2.056% Thursday.  The yield curve widened to +1.840%, compared to +1.826% 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 slightly stronger against the euro and pound, but slightly weaker against the pound.  The dollar trades at US$77.344, compared to US$76.945 the prior day, and above its US$77.190 50-day, US$75.848 100-day, and US$75.718 200-day averages.  The euro trades at US$1.3650, compared to US$1.3750 Friday and US$1.3606 the day prior.  The euro trades worse than its US$1.3710 50-day and US$1.4013 100-day averages.  In Japan, the dollar trades at ¥76.99, compared to ¥77.20 Friday and ¥77.65 the prior day.  The yen trades worse than its 50-day moving average ¥76.975.
  • Commodities prices are mixed, with lower energy, lower precious metals, higher aluminum and copper, and mixed agriculture prices.
Volatility, Skew:
  • The VIX ended at 30.04, down -8.44% from 32.81 at the prior close.  The VIX is -3.30% below its 20-day moving average 31.06.
  • The Euro Stoxx 50 volatility index (V2X) is up +2.68% to 40.58 from 39.53 the prior day.  The V2X index trades +3.12% above its 39.34 20-day moving average, -22.9% below the 52.62 30-day high, and +43.4% above the 28.29 30-day low.
  • The Hang Seng volatility index (VHSI) fell -6.02% to 32.95 from 35.06 the prior day.  The VHSI index trades -6.98% below its 35.42 20-day moving average.
  • CBOE skew fell -0.54% to 124.56 from 125.24 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.  There are no scheduled economic reports.  Reporting begins tomorrow at 8:30, with the October producer price index, advance retail sales, and November Empire manufacturing. At 10:00, September business inventories are released.
Overseas news: This weekend, Mario Monti, formerly an economist who served on the European Commission, became Italy’s new prime minister.  Today, Italy sold the maximum targeted amount of 3 billion in 5-year debt at auction with yields declining -11 basis points to 6.29%.  Press reports indicate the German government continues to analyze a Greek departure from the Eurozone.  Today, Moody’s published a cautious report on Europe’s Emergency Financial Stabilization Fund debt, saying the fund’s current size is inadequate to support the region and the ability of the entity to successfully sell its debt is in question.  Today, Standard & Poor’s placed Hungary’s BBB- credit rating on watch negative.  In the third quarter, Japan’s GDP rose +6.0% over the prior quarter.
Company news/ratings changes:
·         BAC – divests most of its remaining China Construction Bank stake, generating an after-tax profit of $1.8 billion and retaining 1% of CCB.
·         NLY – initiated at overweight at JP Morgan
3Q2011 Earnings.  The third quarter’s earnings reports surprised expectations.  Of the 428 S&P500 companies that reported earnings to date, 73% (312 out of 428) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +4.8% (versus a historical average of +2%).  EPS is up +16.4% over the prior year.  Though challenged in the current operating environment, 80% 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 ($99.13) and 11.6x estimated 2012 earnings (decreased to $109.23 from $111.57), compared to 12.5x and 11.4 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 +4.8%, and +1.8%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.9% and +28.8%, respectively. 
Large-cap banks trade at a median 1.20x tangible book value, and 11.1x and 9.8x 2011 and 2012 consensus earnings, respectively, compared to 1.19x tangible book value and 10.8x/9.6x 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 +28.9% and +53.8%, respectively.
Options.  Options markets are neutral to bearish.  Composite options markets are bearish, index options markets are bearish, and equity options markets are bearish.  The composite put/call ratio closed at 0.93, compared to 1.16 the prior day and below its 5- and 10-period moving averages of 1.12 and 1.16, respectively.  The index put/call ratio closed at 1.16, compared to 1.63 the prior day and below the 5- and 10-period moving averages of 1.53 and 1.59, respectively.  The equity put/call ratio closed the day at 0.64, compared to 0.76 the prior day and below its 5- and 10-period moving averages of 0.72 and 0.73, respectively.   
NYSE Indicators.  Volume fell -19.1% to 900.15 million shares, from 1.123 billion shares Wednesday, 0.82x the 1.095 billion share 50-day moving average.  Market breadth was positive,  and up volume led down volume.  Advancing stocks led decliners by +1,161 (compared to -2,517 the prior day), or 2.26:1.  Up volume led down volume by 2.61:1.
SPX. On lower volume, the SPX rose +24.09 points, or +1.94%, to end at 1263.80.  Volume fell -17.99% to 576.79 million shares, down from 703.29 million shares Thursday and below the 849.96 million share 50-day moving average. For the 64th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1200.78 vs. 1272.27, respectively)The SPX closed above its 200-week moving average (1137.91) for the 26th straight session. 
From its prior close at 1239.69, the SPX gapped higher to 1255 at the open and climbed to the 1265 level by 11:00.  The index maintained its gains through the day and traded in a narrow 5 point spread between 1265 and 1260 through the close.  The index finished instead that 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.  November 8th’s strong gains in higher volume reconfirmed the uptrend after last week’s sharp losses place the trend under pressure.   The SPX closed below 1300 for the 75th straight session but above 1200 for the 23rd straight session.  The index closed above its April 2010 highs for the 14th time in the previous 15 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 +1.60%) above its 20-day moving average (1243.91) for the first time in three straight sessions.  The index closed (by +5.25%) above its 50-day moving average for the 24th straight session.  The index closed (by +5.25%) above its 100-day moving average (1227.66) for the 12th time in 13 sessions.  The SPX closed -0.66% below its 200-day moving average, closing below that average for the ninth time in 10 sessions.  The 20- and 50-day moving averages rose.  The directional momentum indicator switched to positive for the first time in three sessions, and the trend is weak and declining.  Relative strength rose to 56.04 from 51.94, a neutral range.  Next resistance is at 1273.85; next support is at 1246.99.
BKX.  On lower volume, the KBW bank index rose +0.81 points, or +2.09%, to end at 39.54, recording the 70th close below the prior 52-week low of 42.70 from August 25, 2010 and finishing below the 40-level for the fifth time in the last six sessions.  Volume fell -10.11% to 72.18 million shares, down from 88.30 million shares Thursday and below the 105.24 million share 50-day average. The BKX closed -8.00% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -31.77% and -28.92% below its April 23, 2010, and February 14, 2011 respective closes.
Financials outperformed the market, and regionals outperformed large-cap banks.  From its prior close at 38.73, the BKX gapped higher to 39.35, setting the intra-day low, and climbed to the intra-day high of 13.78 at 11:00.  Through 1:30, the index retraced those gains back to the 39.40 level and traded between 39.55 and 39.40 through the close.  The BKX finished at the high end of that narrow trading range. 
Technical indicators are negative but improvingBank stocks are leading the market’s direction, which switched to an uptrend after October 13’s confirmation of October 4th’s strong reversal.  November 8th’s strong gains in higher volume reconfirmed the uptrend after last week’s sharp losses placed the trend under pressure.  The BKX has now recorded its 23rd 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 some gaps are narrowing and some averages are rising.  The 50-day average (37.81) crossed below the 100- and 200-day moving averages (40.59 and 45.92, respectively) on April 25th and June 16th.  The 20-day closed (by +1.54 points) above the 50-day for the 14th straight session, and the gap expanded.  The 50-day moving average closed (by -8.11 points) below the 200-day moving average for the 108th straight session, but the gap narrowed.  The 100-day moving average closed (by -5.33 points) below the 200-day moving average for the 86th straight session, and the gap expanded.  The BKX closed above its 20-day moving average for the first time in three sessions.  The index closed above its 50-day moving average for the 23rd time in 24 sessions.  The index closed below the 100-day moving average for the 10th straight session and below its 200-day moving averages for the 115th consecutive session.  The index closed below 50.0 for the 115th straight session and below the 40.0 level for the fifth time in six sessions.  The directional movement indicator is positive for the 20th straight session, and the trend is weak and declining.  Relative strength rose to 52.09 from 49.