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U.S. Futures Lower Again as Eurozone Illiquidity Adds a New Dimension

|Includes: Goldman Sachs Group Inc. (GS)
This morning.  Equity markets are in correction, with all the major indexes below their 20- and 50-day moving averages.  U.S. equity futures are lower after the 8:30 revised 3Q2011 GDP, after having traded better in most of the pre-market.  Asian equity markets closed mixed on higher volume.  European markets are modestly higher.  The dollar is weaker, and the euro is correspondingly stronger.  U.S. equity options markets suggest a neutral short-term outlook.   Commodities prices are generally higher.  U.S. Treasury yields are higher at the long end, but the 10-year yield remains below 2.0%.  U.S. repo rates are unchanged.  Overnight and 3-month LIBO remain elevated.  Euribor-OIS spreads are at 2011 highs.  After a fair value adjustment of +3.44 points, December SPX equity futures are at 1173.00, down -14.04 points.  The SPX opens at 1188.04, -12.9% below its April 29 multi-year 1363.61 closing high, -4.44% below its 20-day and -1.63% below its 50-day moving averages.  The SPX is -5.53% below its 1257.64 year-end close.  Next resistance is at 1196.02.  Next support is at 1180.86.
Tuesday.  The recent fade of U.S. equity markets continued, but the pace slowed. Before the open, markets soured after a lower-than-expected revision of U.S. 3Q2011 GDP, but the larger focus was on Eurozone sovereign and banking developments, which continue without any clear path to resolution. Notably, volume fell on all the major exchanges and remained well below the 50-day moving average.  The NYSE composite booked a -0.55% loss, followed by the DJI, SPX, and Nasdaq, which lost -0.46%, -0.41%, and -0.07%, respectively.  Most market segments ended lower.  Leaders were health care and consumer goods, which gained at least +0.07%. Laggards were financials, oil and gas, and utilities, which lost at least -0.85%.
Intraday, the SPX traded to a mid-morning intraday low of 1181.65, below the 1183.16, a 50% retracement of gains from the recent November 8th high.  Next support levels are 1171, the October 7th high, and 1158, a 61.8% Fibonacci retracement of gains from recent highs.
Trading desk commentary focused on the latest FOMC meeting minutes, most notable in that any near term QE3 is unlikely, followed after the close by the Fed’s publication of a final rule describing annual large-bank stress testing procedures. Intraday, new IMF credit lines briefly lifted markets off their intraday lows, but the facilities are too small to provide material assistance to resolve Eurozone sovereign and liquidity issues. After the super-committee failure, the list of items on Congress’ to-do list seems increasingly impossible. In Europe, the focus turns to bank liquidity, which is rapidly taking on a crisis aspect. The peripheral Eurozone banks report deposit outflows. Today’s poor 10-year bund offering suggests liquidity sufficiency has affected Eurozone bank demand for even the best Eurozone credits.
In Asia, Japanese equity markets are closed for the Labor/Thanksgiving Day holiday. In China, equity markets closed lower, on lower volume, after a weak October PMI report show contraction in manufacturing. In Hong Kong, the Hang Seng fell -2.12%, on a -19.4% decrease in volume.  HSI volatility rose +2.98%.  The Shanghai composite fell -0.73%, on -1.75% decrease in volume.  Commentary focused on yesterday’s disappointing revision of 3Q2011 U.S. GDP, Chinese manufacturing, and Australia’s approval of a mining tax. 
In Japan, the NKY closed Tuesday at 8,314.74, down from 8,348.27 at the prior close.  The NKY closed -4.21% below its 20-day moving average and down -18.7% for the year. 
In China, the Hang Seng Index closed at 17,864.43, its lowest closed since October 10th, down from 18,251.59 at the prior close.  The index gapped lower to open at 17,954.60, and subsequently traded within a narrow range, with an intraday low of 17,838.70. The index ended -7.42% and -4.40% below its respective 20-day and 50-day moving averages.  Among market segments, only consumer services closed higher, up +0.59%. Other leaders were utilities and consumer goods, which closed down at least -0.87%. Financials lost -2.25%.  Laggards were oil and gas, technology, and basic materials, which closed off at least -2.51%.
In Shanghai, the SHCOMP closed at 2,395.06, down from 2,412.63 at the prior close.  The index opened at 2,415.20, but quickly succumbed to poor macro-economic news and traded to a mid-morning 2,390.65 intraday low. The index traded within a narrow range through the close. The SHCOMP closed -3.32% and -2.05% below its respective 20-day and 50-day moving averages.  Most market segments closed lower. Utilities managed a +0.09% gain. Other leaders were consumer goods and health care, which lost -0.33%. Financials lost -0.68%. Telecommunications, industrials, and basic materials lagged with losses of at least -0.71%.
In Europe, equities are modestly mostly lower, through the DAX is trading near its prior day close. Commentary focuses on a weak German 10-year bund offering, for which coverage was a mere 65%. There were suggestions that technical issues contributed to the market’s poor reception, but also that the bund’s 1.98% coupon was mispriced. German 5 year CDS have risen to 101.69 bps, up from 85.6 bps on November 4th, but well below the recent 121.51 bps high on October 4th. The Euro Stoxx 50, FTSE, and DAX are down -0.53%, -0.891%, and -0.06%, respectively.  Compared to the prior day’s 2,136.81 close, the EuroStoxx50 trades at 2,129.05, compared to the 2,109.40 intraday low.  Market segments are mixed.  Leaders are technology, utilities, and basic materials, up at least +0.13%.  Financials are off -0.14%. Laggards are consumer goods, telecommunications, and consumer services, down at least -1.19%.
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 0.14278%, unchanged from 0.14278% Tuesday, but below the 0.25188% year-end level.  USD 3-month LIBOR rose to 0.50611%, the highest of the year, up from 0.50028% the prior day and compared to 0.30281% at year-end 2010.
  • The US Libor-OIS (LOIS) spread rose to 40.6 bps, a new high, from 40.0 bps the prior day, and compares to 12.0 bps at the end of 2010.  Euribor-OIS eased to 92.75 bps,  92.8 bps Tuesday, 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, but well off from the August 2nd high of 33 bps.
  • U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.264% and 1.927%, respectively, compared to 0.258% and 1.917% Tuesday.  The yield curve widened to +1.663%, compared to +1.659% 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 compared to the euro, yen, and pound.  The dollar trades at US$78.771, compared to US$78.266 the prior day, and above its US$77.422 50-day, US$76.101 100-day, and US$75.718 200-day averages.  The euro trades at US$1.3388, compared to US$1.3505 Tuesday and US$1.3489 the day prior.  The euro trades worse than its US$1.3662 50-day and US$1.3946 100-day averages.  In Japan, the dollar trades at ¥77.20, compared to ¥76.97 Tuesday and ¥76.89 the prior day.  The yen trades better than its 50-day moving average ¥76.941.
  • Commodities prices are mostly lower, with lower energy and precious metals, higher aluminum and copper, and lower agriculture prices.
Volatility, Skew:
  • The VIX ended at 31.97, down -2.86%, from 32.91 at the prior close.  The VIX is +2.87% above its 20-day moving average 31.08.
  • The Euro Stoxx 50 volatility index (V2X) is down -1.15% to 39.11 from 39.56 the prior day.  The V2X index trades -0.21% below its 39.20 20-day moving average, -13.7% below the 45.33 30-day high, and +38.3% above the 28.29 30-day low.
  • The Hang Seng volatility index (VHSI) rose +2.98% to 35.55 from 34.52 the prior day.  The VHSI index trades +1.60% above its 34.99 20-day moving average.
  • CBOE skew fell -0.20% to 114.92 from 115.15 at the prior day’s close, and at the below the bottom end of a neutral (115-120) range.  It was last at this level on October 4th, coincident with the start of the last market equity uptrend.  The index tracks the cost of buying out-of-the-money, long-dated options.  A fall suggests that investors are buying more calls than puts, a bullish signal.
U.S. news and economic reporting.  At 8:30, the Bureau of Economic Analysis publishes October durable goods orders (survey -1.2%, actual -0.7%, ex-transportation survey +0.0%, actual +0.7%) and personal income and spending (survey +0.3% and +0.3%, respectively, actual +0.4% and +0.1%). The latest week’s initial jobless claims were 393K, versus 390 survey and 391K prior.
Overseas news: In November, the Eurozone flash purchaser managers index (PMI) rose to 47.2 from 46.5, beat expectations for a decline to 46.1, while Germany’s PMI stayed above the important 50.0 threshold, also beating expectations.  News reports this morning suggest Belgium cannot afford its share of European lender Dexia’s bailout and suggest France should bear a larger share.  Today, Germany received bids for only 65% of its targeted 10-year bond auction amount, with yields rising 5 bps over the market level, sparking Germany’s 5-year credit default swaps to rise above 100.  In November, China’s flash PMI dropped significantly to 48.0 from 51.0 in October. 
Company news/ratings changes:
·         GS – initiated at neutral at Macquarie, $100 price target
3Q2011 Earnings.  The third quarter’s earnings reports surprised expectations.  Of the 463 S&P500 companies that reported earnings to date, 73% (339 out of 463) 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 +15.9% 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 12.0x estimated 2011 earnings ($99.04) and 10.9x estimated 2012 earnings ($109.23), compared to 12.0x 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 +4.7%, and +1.8%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.8% and +28.8%, respectively. 
Large-cap banks trade at a median 1.14x tangible book value, and 10.3x and 9.0x 2011 and 2012 consensus earnings, respectively, compared to 1.14x tangible book value and 10.3x/9.1x 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 1.04, compared to 1.08 the prior day and below its 5- and 10-period moving averages of 1.13 and 1.13, respectively.  The index put/call ratio closed at 1.48, compared to 1.59 the prior day and below the 5- and 10-period moving averages of 1.50 and 1.49, respectively.  The equity put/call ratio closed the day at 0.67, compared to 0.68 the prior day and below its 5- and 10-period moving averages of 0.77 and 0.76, respectively.   
NYSE Indicators.  Despite a 5th consecutive decline in the SPX, volume fell -5.80% to 878.19 million shares, from 932.24 million shares the prior day, only 0.82x the 1.066 billion share 50-day moving average.  Market breadth was negative, and up volume lagged down volume.  Advancing stocks lagged decliners by -708 (compared to -2,157 the prior day), or 0.62:1.  Up volume lagged down volume by 0.36:1.
SPX. On lower volume, the SPX fell -4.94 points, or -0.41%, to end at 1188.04.  Volume fell -8.24% to 674.99 million shares, down from 735.62 million shares Monday and below the 831.99 million share 50-day moving average. For the 71st straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1207.70 vs. 1269.27, respectively)The SPX closed above its 200-week moving average (1136.65) for the 33rd straight session. 
From its prior close at 1192.98, the SPX opened flat, quickly fell to 1189, but then rebounded to 1196 by 9:45.  Through 11:45, the index sold off, breaking below 1190 at 10:50 and reaching the intra-day low of 1181.65.  Through 1:20, the index reversed, rallying back to break-even by 1:00 and reaching the intra-day high of 1196.81.  The index reversed again into the close, and fell to the 1188 level by 3:00 where it traded into the bell, finishing with a modest loss.    
Technical indicators are negative.  The market returned to a correction following last Wednesday and Thursday’s distribution days, ending an uptrend that was confirmed on October 12thThe SPX closed below 1300 for the 82nd straight session and below 1200 for the second straight session.  The index closed below its April 2010 highs for the fourth straight session.  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 index closed below all major moving averages for the second straight session since October 7thThe SPX closed (by -4.44%) below its 20-day moving average (1243.23) for the fifth straight session.  The index closed (by -1.63%) below its 50-day moving average for the second straight session.  The index closed (by -2.80%) below its 100-day moving average (1222.29) for the fourth straight session.  The SPX closed -6.40% below its 200-day moving average, closing below that average for the 16th time in 17 sessions.  The 20- and 50-day moving averages rose.  The directional momentum indicator is negative for the fourth straight session, and the trend is weak and increasing.  Relative strength fell to 41.25 from 42.12, a neutral range.  Next resistance is at 1196.02; next support is at 1180.86.
BKX.  On lower volume, the KBW bank index fell -0.46 points, or -1.26%, to end at 35.94, recording the 77th close below the prior 52-week low of 42.70 from August 25, 2010 and finishing below the 40-level for the 12th time in the last 13 sessions.  Volume fell -18.69% to 73.97 million shares, down from 90.98 million shares Monday and below the 102.54 million share 50-day average.  The BKX closed -16.38% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -37.98% and -35.39% below its April 23, 2010, and February 14, 2011 respective closes.
Financials underperformed the market, and large-cap banks underperformed regional banks.  From its prior close at 36.40, the BKX opened lower to the 36.30 level but quickly rose to positive territory and set the intra-day high of 36.59 at 9:40.  Through 11:35, the index sold-off, falling nearly -2.0% to the intra-day low of 35.83.  In conjunction with the broader market, the index reversed and reached the break-even line at 1:25.  The index reversed at the break-even line and fell below 36.00 at 2:35.  Through the close, the BKX traded in a narrow range around the 36.00 level but could not hold above it. 
Technical indicators are mostly negativeBank stocks are leading the market’s direction, which returned to correction following last Wednesday and Thursday’s distribution days.  The BKX saw its third straight close below the 50-day moving average, having closed above that level consistently since October 12th.  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 (37.86) crossed below the 100- and 200-day moving averages (39.89 and 45.32, respectively) on April 25th and June 16th.  The 20-day closed (by +1.16 points) above the 50-day for the 21st straight session, and the gap narrowed.  The 50-day moving average closed (by -7.46 points) below the 200-day moving average for the 115th straight session, but the gap narrowed.  The 100-day moving average closed (by -5.43 points) below the 200-day moving average for the 93rd straight session, and the gap expanded.  The BKX closed (by -7.90%) below its 20-day moving average for the 10th time in 11 sessions.  The index closed (by -5.07%) below its 50-day moving average for the fourth straight session.  The index closed (by -9.89%) below the 100-day moving average for the 17th straight session and (by -20.70%) below its 200-day moving averages for the 122nd consecutive session.  The index closed below 50.0 for the 122nd straight session and below the 40.0 level for the 12th time in 13 sessions.  The directional movement indicator is negative for the seventh straight session, and the trend is weak and increasing.  Relative strength fell to 39.90 from 41.41, the lower end of a neutral range.  Next resistance is 36.41; next support at 35.65.