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U.S. Futures Strong on Eurohope

This morning.  U.S. equity markets remain in correction, pending some adequate market follow-through to last Monday’s and Wednesday’s strong gains, which were tempered by  Thursday’s losses and Friday’s mixed markets and negative reversals on the DJI and SPX. All major indexes are above 20-, 50-, and 100-day moving averages, though only the DJI closed above its 200-day moving average.  U.S. equity futures are significantly higher, responding to strong equity markets in Europe and Italy’s austerity program proposal.  Asian equity markets closed mixed, with greater strength in Japan and Hong Kong, but volume declined.  European markets are again very strong and led by financials. The dollar is weaker, and the euro correspondingly stronger.  U.S. equity options markets suggest a neutral short-term outlook.   Commodities prices are mostly higher.  U.S. Treasury yields are higher, but the 10-year is again below 2.10%.  U.S. repo rates are unchanged.  Overnight and 3-month LIBO remain elevated.  Euribor-OIS spreads are near 2011 highs.  After a fair value adjustment of -0.07 points, December SPX equity futures are at 1260.60, up +17.17 points.  The SPX opens at 1244.28, -8.75% below its April 29 multi-year 1363.61 closing high, +1.47% above its 20-day and +2.81% above its 50-day moving averages.  The SPX is -1.06% below its 1257.64 year-end close.  Next resistance is at 1255.12.  Next support is at 1238.39.
Friday.  U.S. equity markets proved unable to hold onto strong morning gains and closed mixed, with negative reversals on the DJI and SPX. Volumes fell. The NYSE composite and Nasdaq closed with meager +0.04% and +0.03% gains, while the DJI and SPX closed off -0.01% and -0.02%, respectively. Market segments were mixed.  Leaders were financials and technology, which closed up +1.24% and +0.33%, respectively. Laggards were basic materials, utilities, and health care, which closed off at least -0.46%.  From its prior 1244.58 close, the SPX gapped quickly to nearly 1254 and traded to an intraday high of 1260.08 before 11:00, where it found substantial resistance. Selling cut the SPX back to 1247 by noon, and the indexes gradually gave up most or all their gains by the close. All indexes had turned negative in the final minutes of the session, before late buying brought the NYSE and Nasdaq back to small gains. Despite the mixed result, market breadth was positive, and up volume led down volume.
Trading desks opined how the day’s fade underscored that markets remain range-bound. Encouraging U.S. economic news has not yet been able to overcome negative and skeptical sentiment that the Eurozone’s troubles will find resolution before its policymakers visit disaster on markets through their ineptitude and folly.  Despite skepticism, investors worry that they might miss a strong rally, at least in the run-up to the “Leaders” Summit on Friday, December 9th
 
In Asia, on lower volume, Asian equity markets closed mixed, with greater strength in Tokyo and Hong Kong.  In Tokyo, the NKY rose +0.60%.  Volume fell -9.63%.  In Hong Kong, the Hang Seng rose +0.73%, on a -30.7% decrease in volume.  The Shanghai composite fell -1.16% on a -12.1% decrease in volume.  Commentary focused on Italy’s austerity program announcement and speculation that China would further ease monetary policy. Chinese November HSBC services PMI was 52.5, down from 54.1 the prior month.
In Japan, the NKY closed at 8,695.98, up from 8,643.75 at the prior close.  The NKY closed +2.37% above its 20-day moving average, but down -15.0% for the year.  The index opened at its intraday 8,704.48 high and traded within a narrow range (intraday low of 8,668.04) through the day, with the index strengthening into the close. Most market segments closed higher, though industrials closed down -0.31%. Leaders were consumer services, health care, and oil and gas, which closed up at least +1.56%. Financials gained +0.80%. Other laggards were technology and basic materials, which closed up at least +0.22%.
In China, the Hang Seng Index closed at 19,179.69, up from 19,040.39 at the prior close.  The index opened higher, but quickly traded lower to an intraday low of 18,972.90, but reversed in mid-morning to an intraday high of 19,188.90, before trading sideways to the close. Volatility rose +2.16% .  The index ended +2.32% and +3.47% above its respective 20-day and 50-day moving averages.  Most market segments closed higher, led by basic materials, consumer services, and consumer goods, which gained at least +2.44%. Financials gained +0.75%. Laggards were industrials (up +0.51%) and telecommunications and utilities, which closed off at least -0.07%.
In Shanghai, the SHCOMP closed at 2,333.23, down from 2,360.66 at the prior close.  The index opened at 2,363.11, but quickly traded lower to test support at 2,335 before rallying back to 2,357 at mid-morning. The index trended lower through the rest of the day, to a late-session intraday low of 2,327.61. The SHCOMP closed -4.34% and -3.91% below its respective 20-day and 50-day moving averages.  Most market segments closed lower. Oil and gas and financials added at least +0.15%.  The other leader, basic materials, lost -1.92%. Laggards were health care, consumer goods, and technology, which closed at least -2.94% lower.
In Europe, equities are higher and trading near their intraday highs.  As on Friday, financials are leading the advance.  Commentary focuses on Italy’s proposed €30 billion austerity plan. Since November 23rd, Italian sovereign 5-year CDS have collapsed 104 bps to 458.26. Also, UK November non-manufacturing PMI rose to 52.1 from 51.3 in October and surprised consensus 50.5. Eurozone retail sales also rose +0.4% versus consensus +0.1%. The Euro Stoxx 50, FTSE, and DAX are up +1.64%, 0.78%, and 0.96%, respectively.   Compared to the prior day’s 2,342.50 close, the Euro Stoxx 50 trades at 2,380.52, the intraday high.  The index is +6.43% and +5.02% above its respective 20- and 50-day moving averages.  Most market segments are higher.  Financials, utilities, and basic materials lead with gains of at least +1.86%. Laggards are telecommunications and health care, which are up at least +0.15%, and technology, which is down -1.73%.
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 0.14950%, up from 0.14611% Friday, but below the 0.25188% year-end level.  USD 3-month LIBOR rose to 0.53390%, down from 0.52833% the prior day and compared to 0.30281% at year-end 2010.
  • The US Libor-OIS (LOIS) spread rose to 0.437%, the year’s high, up from d to 43.0 bps the prior day, and compares to 12.0 bps at the end of 2010.  Euribor-OIS eased to 98.3 bps from 98.9 bps Friday, and 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 was 10.0 bps Friday, unchanged from 10.0 bps Thursday, but well off from the August 2nd high of 33 bps.
  • U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.260% and 2.091%, respectively, compared to 0.250% and 2.033% Friday.  The yield curve widened to +1.831%, compared to +1.783% Friday.  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 lower at US$78.491, but off its intraday US$78.362 low, compared to the euro, yen, and pound.  The dollar trades at US$78.491, compared to US$78.625 the prior day, and above its US$77.654 50-day, US$76.384 100-day, and US$75.776 200-day averages.  The euro trades at US$1.3441, compared to US$1.3391 Friday and US$1.3461 the day prior.  The euro trades worse than its US$1.3618 50-day and US$1.3883 100-day averages.  In Japan, the dollar trades at ¥78.03, compared to ¥77.99 Friday and ¥77.70 the prior day.  The yen trades worse than its 50-day moving average ¥77.141.
  • Commodities prices are mostly higher, with higher energy, mixed precious metals, aluminum, and lower copper, and higher agriculture prices.
Volatility, Skew:
  • The VIX ended at 27.52, up +0.40% from 27.41 at the prior close.  The VIX is -12.3% below its 20-day moving average 31.39.
  • The Euro Stoxx 50 volatility index (V2X) is down -0.09% to 35.65 from 35.69 the prior day.  The V2X index trades -9.99% below its 39.59 20-day moving average, -20.3% below the 44.69 30-day high, and +20.3% above the 28.29 30-day low.
  • The Hang Seng volatility index (VHSI) rose +2.16% to 28.3 from 27.74 the prior day.  The VHSI index trades -15.5% below its 33.56 20-day moving average.
  • CBOE skew rose -0.50% to 116.31 from 116.90 at the prior day’s close, and in a neutral (115-120) range.  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 10:00, the ISM reports its November non-manufacturing ISM. Survey expects improvement to 53.8 from 52.9 in October. Also October factory orders are expected to fall -0.3% from 0.3% the prior month.
Overseas news: This weekend’s news reports speculated the European Central Bank is preparing a €1 trillion cash injection for Eurozone sovereign debt purchases.  Today, the Italian cabinet approved Prime Minister Monti’s €30 billion austerity package, with a parliamentary vote anticipated by December 25th.  In November, the Eurozone services purchasing managers index fell slightly to 47.0, close to expectations of 47.2.  In November, China’s non-manufacturing purchasing managers index fell to 49.7 from 57.7 in October. 
Company news/ratings changes:
·         None.
 
3Q2011 Earnings.  The third quarter’s earnings reports surprised expectations.  Of the 468 S&P500 companies that reported earnings to date, 73% (342 out of 468) 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 12.6x estimated 2011 earnings ($99.05) and 11.4x estimated 2012 earnings ($108.92), compared to 12.6x 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 +4.7%, and +1.5%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.8% and +28.5%, respectively. 
Large-cap banks trade at a median 1.20x tangible book value, and 10.8x and 9.4x 2011 and 2012 consensus earnings, respectively, compared to 1.17x tangible book value and 10.8x/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 +29.9% and +53.8%, respectively.
Options.  Options markets are neutral.  Composite options markets are neutral, index options markets are neutral to bullish, and equity options markets are bearish.  The composite put/call ratio closed at 0.98, compared to 0.95 the prior day and in between its 5- and 10-period moving averages of 0.93 and 1.02, respectively.  The index put/call ratio closed at 1.34, compared to 1.18 the prior day and in between the 5- and 10-period moving averages of 1.26 and 1.38, respectively.  The equity put/call ratio closed the day at 0.59, compared to 0.66 the prior day and below its 5- and 10-period moving averages of 0.61 and 0.68, respectively.   
NYSE Indicators.  Volume rose +1.98% to 872.80 million shares, from 855.83 million shares Thursday, 0.85x the 1.026 billion share 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +630 (compared to -610 the prior day), or 1.53:1.  Up volume led down volume by 1.40:1.
SPX. On higher volume, the SPX fell -0.30 points , or -0.02%, to end at 1244.28.  Volume rose +7.88% to 664.90 million shares, up from 616.33 million shares Thursday but below the 788.64 million share 50-day moving average. For the 78th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1210.25 vs. 1264.95, respectively)The SPX closed above its 200-week moving average (1135.75) for the 40th straight session. 
From its prior close at 1244.58, the SPX gapped higher at the open to the 1254 level.  Through 10:25, the index rallied to the intra-day high of 1260.08.  Unable to break meaningfully above 1260, the index sold off through 11:50, retracing gains back to the 1148 lelve.  A rally to 1253 at 1:00 was sold, and the index trailed off through the day’s end, turning negative at 3:45 and setting the intra-day low of 1243.35 at 3:53.  The index closed with a modest loss and at the low end of the day’s range.  
Technical indicators are mostly negative.  The market returned to a correction following mid-November’s reversal.  The SPX closed below 1300 for the 88th straight session but above 1200 for the third straight session.  The index closed above its April 2010 highs for the third 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 7thThe SPX closed (by +1.47%) above its 20-day moving average (1226.31) for the third straight session.  The index closed (by +2.81%) below its 50-day moving average for the third straight session.  The index closed (by +2.54%) above its 100-day moving average (1213.48) for the third straight session.  The SPX closed -1.63% below its 200-day moving average, closing below that average for the 23rd time in 24 sessions.  The 50-day moving average rose.  The directional momentum indicator is positive for the third straight session, and the trend is weak and stable.  Relative strength fell to 55.42 from 55.49, a neutral range.  Next resistance is at 1255.12; next support is at 1238.39.
BKX.  On higher volume, the KBW bank index rose +0.71 points, or +1.87%, to end at 38.59.  The index recorded its 84th straight close below the prior 52-week low of 42.70 from August 25, 2010 and finished below the 40-level for the 19th time in the last 20 sessions.  Volume rose 30.76% to 90.50 million shares, up from 69.21 million shares Thursday but below the 100.10 million share 50-day average.  The BKX closed -10.21% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -33.41% and -30.63% below its April 23, 2010, and February 14, 2011 respective closes.
Financials were the market’s best performing sector, and large-cap banks outperformed regional banks.  From its prior close at 37.88, the BKX gapped higher to 38.27, setting the intra-day low.  Through 10:20, the index rallied strongly to set the intra-day high of 39.26.  The index sold off through 11:55 to reach 38.70.  Through 2:00, the index continued testing 39.00, but could not break meaningfully above that level.  The index sold off into the close, falling through the 38.60 level at 3:45 and closing near that mark.
Technical indicators are mostly negativeBank stocks are leading the market’s direction, which returned to correction following mid-November’s reversal.  Moving averages align bearishly, as most shorter duration averages are below the longer duration averages and some moving averages are falling.  The 50-day average (37.77) crossed below the 100- and 200-day moving averages (39.09 and 44.66, respectively) on April 25th and June 16th.  The 20-day closed (by -0.01 points) below the 50-day for the first time in 28 sessions, and the gap expanded.  The 50-day moving average closed (by -6.89 points) below the 200-day moving average for the 122nd straight session, but the gap narrowed.  The 100-day moving average closed (by -5.57 points) below the 200-day moving average for the 100th straight session, and the gap held steady.  The BKX closed (by +2.20%) above its 20-day moving average for the third straight session.  The index closed (by +2.18%) above its 50-day moving average for the third straight session.  The index closed (by -1.28%) below the 100-day moving average for the 24th straight session and (by -13.59%) below its 200-day moving averages for the 129th consecutive session.  The index closed below 50.0 for the 129th straight session and below the 40.0 level for the 19th time in 20 sessions.  The directional movement indicator is positive for the third straight session, and the trend is weak and decreasing.  Relative strength rose to 53.93 from 51.16, a neutral range.  Next resistance is 39.18; next support at 38.08.