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U.S. Futures Lower on European Concerns

This morning.   The current equity market uptrend is under pressure.  U.S. equity futures are moderately lower, but better than the morning’s lows.  Asian equity markets closed mixed on mixed volume.  European markets are mixed.  The dollar is slightly stronger on the day, while the euro is correspondingly weaker on Eurozone uncertainties.  U.S. equity options markets suggest a neutral short-term outlook.   Commodities prices are lower.  U.S. Treasury yields are slightly lower at the long end of the curve.  U.S. repo rates have moved higher over the past week, to their highest levels since September. 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 +1.41 points, December SPX equity futures are at 1242.90, down -10.51 points.  The SPX opens at 1257.81, -7.76% below its April 29 multi-year 1363.61 closing high, +0.78% above its 20-day and +4.45% above its 50-day moving averages.  The SPX is +0.01% above its 1257.64 year-end close.  Next resistance is at 1266.59; next support is at 1246.68.
Tuesday.  U.S. equity markets struggled through the morning session, but reversed moderate losses to end moderately higher. The Nasdaq produced the best +1.09% gain, followed by the SPX, NYSE composite, and DJI, which ended with gains of +0.48%, +0.21%, and +0.14%, respectively. Volumes remained unimpressive at an anemic 0.72x the 50-day moving average.  Most market segments closed higher, led by technology, industrials, and consumer goods, with gains of at least +0.52%. Financials gained +0.48%. Laggards were health care, basic materials, and oil and gas.
The positive reversal seemed sparked by news that the new Italian prime minister-designate had successfully assembled a new “technical cabinet”, one that he will present today.  Also, there were some indications that Germany might relax its opposition to greater Eurozone financial assistance. This took the form a remarks that the time had passed for a political solution to Europe’s sovereign debt problems, that the ECB must step in with a modified Eurobond facility to deal with current illiquid markets. Separately, Greece’s new government will face a confidence vote today. The intraday highs were set in the final hour, with the SPX at an intraday high of 1264.25 at 3:30, before weakening into the close. Trading desks noted the weak volume, accompanied by “reluctant” investor optimism that a year-end rally will carry markets through resistance to test the year’s highs. 

The distribution day count was unchanged.  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 lower on higher volume in Tokyo and Shanghai. In Japan, the Nikkei fell -0.92% on a +19.1% increase in volume.  The Hang Seng fell -2.00%, on a -68.7% decrease in volume.  HSI volatility rose +5.68%.  The Shanghai composite rose +2.48%, on +18.0% increase in volume.  Commentary focused on Eurozone sovereign concerns.
In Japan, the NKY closed at 8,463.16, down from 8,541.93 at the prior close.  The NKY closed -3.17% below its 20-day moving average and down -17.3% for the year.  The NKY opened to the upside and traded to an early morning intraday high of 8,567.64, before weakening into the afternoon. The 8,459.30 intraday low was set just before the close.  Most market segments closed lower.  Leaders were telecommunications and utilities, which closed at least +0.02% higher. The index closed -3.17% below its 20-day moving average. Laggards were basic materials, financials, and industrials, which lost +1.30%. 
In China, the Hang Seng Index closed at 18,960.90, down from 19,348.44 at the prior close.  The index opened at its 19,483.10, but sold off immediately, and trended lower to a mid-afternoon 18,768.70 intraday low. A late rally narrowed the day’s losses.  The index ended -1.56% below and +0.74% above its respective 20-day and 50-day moving averages.  Most market segments closed lower.  All market segments closed lower. Telecommunications, utilities, and technology led with losses of at least -0.83%. Oil and gas, financials, and basic materials lagged with losses of at least -2.09%.
In Shanghai, SHCOMP closed at 2,466.96, down from 2,529.76 at the prior close.  The index opened at 2,529.46, but trended lower through the day to a 2,456.86 intraday low minutes before the close. The SHCOMP closed +0.33% and +0.46% above its respective 20-day and 50-day moving averages.  All market segments closed off at least -1.68%. Leaders were technology, health care, and consumer goods. Financials lost -2.28%. Telecommunications, utilities, and basic materials lagged with losses of at least -2.78%.
In Europe, equities are mixed. The Euro Stoxx 50, FTSE, and DAX are +0.18%, -0.42%, and -0.69%, respectively.  Compared to the prior day’s 2,254.00 close, the EuroStoxx50 trades at 2,256.81, compared to the 2,238.39 intraday low.  Most market segments are higher, led by consumer services, health care, and telecommunications, with gains of at least +0.50%. Financials are up +0.29%. Laggards are utilities, consumer goods, and basic materials, with losses of at least -0.31%.
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 0.14167%, down from 0.14389% Tuesday and below the 0.25188% year-end level.  USD 3-month LIBOR rose to 0.47111%, the highest of the year, up from 0.46556% the prior day and compared to 0.30281% at year-end 2010.
  • The US Libor-OIS (LOIS) spread rose to 38.6 bps, the highest level of the year, up from 37.8 bps Tuesday and compares to 12.0 bps at the end of 2010.  Euribor-OIS rose to 90.5 bps, down from 90.8 bps Tuesday, the highest level of the year, 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 16.0 bps, unchanged from 16.0 bps Tuesday, up from 3.0 bps a week ago, but well off from a recent high of 33 bps on August 2nd.
  • U.S. Treasury yields lower, with 2- and 10-year maturities yielding 0.242% and 2.043%, respectively, compared to 0.238% and 2.045% Tuesday.  The yield curve narrowed to +1.801%, compared to +1.807% 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 yen.  The dollar trades at US$78.084, compared to US$77.872 the prior day, and above its US$77.285 50-day, US$75.912 100-day, and US$75.721 200-day averages.  The euro trades at US$1.3510, compared to US$1.3539 Tuesday and US$1.3633 the day prior.  The euro trades worse than its US$1.3689 50-day and US$1.3996 100-day averages.  In Japan, the dollar trades at ¥76.93, compared to ¥77.03 Tuesday and ¥77.07 the prior day.  The yen trades better than its 50-day moving average ¥76.957.
  • Commodities prices are lower, with lower energy, precious metals, aluminum and copper, and agriculture prices.
Volatility, Skew:
  • The VIX ended at 31.22, up +0.29% from 31.13 at the prior close.  The VIX is +0.92% above its 20-day moving average 30.93.
  • The Euro Stoxx 50 volatility index (V2X) is down -0.21% to 39.50 from 39.61 the prior day.  The V2X index trades -0.06% below its 39.41 20-day moving average, -13.8% below the 45.65 30-day high, and +39.2% above the 28.29 30-day low.
  • The Hang Seng volatility index (VHSI) rose +5.68% to 35.51 from 33.60 the prior day.  The VHSI index trades +0.84% above its 35.22 20-day moving average.
  • CBOE skew rose +0.33% to 124.97 from 124.56 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.  Economic reporting began at 7:00 with the latest week’s -10.0% decline in MBA mortgage applications, down from +10.3% prior week. At 8:30, the October consumer price index is released, followed at 9:00 by September long-term TIC flows, and at 9:15, October industrial production and capacity utilization (survey +0.4% and 77.6%, respectively).
Overseas news: 
Today, the Bank of England cut its 2012 GDP forecast, saying growth will most likely remain below +1.0% next year.  Press reports indicate that Italian banks asked the European Central Bank to widen the range of collateral the ECB accepts for repo operations.  In October, the Eurozone consumer price index rose +3.0% over the prior year, matching expectations.  Today, the People’s Bank of China said its overall stance on monetary policy is to remain “prudent,” indicating the bank is not likely to ease policy anytime soon. 
Company news/ratings changes:
·         None.
 
3Q2011 Earnings.  The third quarter’s earnings reports surprised expectations.  Of the 441 S&P500 companies that reported earnings to date, 73% (324 out of 441) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +4.7% (versus a historical average of +2%).  EPS is up +16.0% over the prior year.  Though challenged in the current operating environment, 80% of companies reported increased revenues over the prior year and 58% 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 ($99.18) and 11.5x estimated 2012 earnings (decreased to $109.23 from $111.57), compared to 12.6x and 11.5 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 +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 11.0x and 9.6x 2011 and 2012 consensus earnings, respectively, compared to 1.19x tangible book value and 10.9x/9.5x 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.  Composite options markets are neutral, index options markets are neutral, and equity options markets are neutral.  The composite put/call ratio closed at 1.10, compared to 1.11 the prior day and below its 5- and 10-period moving averages of 1.13 and 1.12, respectively.  The index put/call ratio closed at 1.48, compared to 1.46 the prior day and below the 5- and 10-period moving averages of 1.58 and 1.53, respectively.  The equity put/call ratio closed the day at 0.72, compared to 0.73 the prior day and in between its 5- and 10-period moving averages of 0.75 and 0.71, respectively.   
NYSE Indicators.  Volume rose +10.0%to 781.03 million shares, from 709.97 million shares the prior day, but just 0.72x the 1.077 billion share 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +795 (compared to -1,585 the prior day), or 1.72:1.  Up volume led down volume by 1.86:1.
SPX. On higher but still relatively light, the SPX rose +6.03 points, or +0.48%, to end at 1257.81.  Volume rose +17.05% to 624.61 million shares, up from 533.61 million shares Monday and below the 841.24 million share 50-day moving average. For the 66th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1204.18 vs. 1271.85, respectively)The SPX closed above its 200-week moving average (1137.58) for the 28th straight session. 
From its prior close at 1251.78, the SPX opened flat and fell to 1248 before rebounding to the 1255 level by 9:50.  Through 11:35, the index retreated, reaching the intra-day low of 1244.34.  A sharp lift at noon brought the index back to breakeven on news that Italian Prime Minister Mario Monti would be able to form a cabinet.   The rally continued through 3:30, and the index reached the intra-day high of 1264.25.  The index fell into the close but finished 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.  November 8th’s strong gains in higher volume reconfirmed the uptrend after the prior week’s sharp losses place the trend under pressure.   The SPX closed below 1300 for the 77th straight session but above 1200 for the 25th straight session.  The index closed above its April 2010 highs for the 16th time in the previous 17 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 +0.78%) above its 20-day moving average (1248.08) for the third straight session.  The index closed (by +4.45%) above its 50-day moving average for the 26th straight session.  The index closed (by +2.49%) above its 100-day moving average (1227.23) for the 14th time in 15 sessions.  The SPX closed -1.10% below its 200-day moving average, closing below that average for the 11th time in 12 sessions.  The 20- and 50-day moving averages rose.  The directional momentum indicator is positive for the third straight session, and the trend is weak and stable.  Relative strength rose to 54.65 from 53.58, a neutral range.  Next resistance is at 1266.59; next support is at 1246.68.
BKX.  On higher volume, the KBW bank index rose +0.19 points, or +0.49%, to end at 38.76, recording the 72nd close below the prior 52-week low of 42.70 from August 25, 2010 and finishing below the 40-level for the seventh time in the last eight sessions.  Volume rose +7.65% to 75.89 million shares, up from 70.49 million shares Monday but below the 103.85 million share 50-day average. The BKX closed -9.82% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -33.11% and -30.33% below its April 23, 2010, and February 14, 2011 respective closes.
Financials performed in-line with the market, and regionals outperformed large-cap banks.  From its prior close at 58.57, the BKX gapped lower to 38.38 but rose back to break-even by 9:55.  Through 11:35, the index fell into negative territory and set the intra-day low of 38.12.  Through 3:05, a sustained rally lifted the index back to breakeven by 12:30 and to the intra-day high of 39.05 at 3:05.  Through the close, the index fell -1.0%, but finished with gains and at the higher end of the day’s 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 the prior week’s sharp losses placed the trend under pressure.  The BKX has now recorded its 25th 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 (37.89) crossed below the 100- and 200-day moving averages (40.43 and 45.76, respectively) on April 25th and June 16th.  The 20-day closed (by +1.56 points) above the 50-day for the 16th straight session, but the gap narrowed.  The 50-day moving average closed (by -7.88 points) below the 200-day moving average for the 110th straight session, but the gap narrowed.  The 100-day moving average closed (by -5.33 points) below the 200-day moving average for the 88th straight session, and the gap expanded.  The BKX closed below its 20-day moving average for the fifth time in six sessions.  The index closed above its 50-day moving average for the 25th time in 26 sessions.  The index closed below the 100-day moving average for the 12th straight session and below its 200-day moving averages for the 117th consecutive session.  The index closed below 50.0 for the 117th straight session and below the 40.0 level for the seventh time in eight sessions.  The directional movement indicator is negative for the second straight session, and the trend is weak and declining.  Relative strength fell to 49.42 from 48.74, a neutral range.  Next resistance is 39.17; next support at 38.24.