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U.S. Futures Mixed as Equities Refocus on Eurozone Concerns

This morning.  U.S. equity markets remain in correction, pending some clear market follow-through to last Monday’s and Wednesday’s strong gains.  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 modestly higher.  Asian equity markets closed lower, on lower volume.  European markets are mixed.  The dollar is slightly weaker, compared to the euro.  U.S. equity options markets suggest a neutral short-term outlook.  Commodities prices are mixed.  U.S. Treasury yields are higher, but the 10-year is 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 +1.28 points, December SPX equity futures are at 1255.10, down -1.18 points.  The SPX opens at 1257.08, -7.81% below its April 29 multi-year 1363.61 closing high, +2.49% above its 20-day and +3.66% above its 50-day moving averages.  The SPX is -0.04% below its 1257.64 year-end close.  Next resistance is at 1267.76.  Next support is at 1245.36.

Monday.  U.S. equity markets tested resistance at 1265 on the SPX, but proved unable to hold above the 200-day moving average.  Late in the session, the SPX found support at 1250 and strengthened again into the close.  All major indexes closed with moderate gains on increased volume.  The Nasdaq led with a +1.10% increase, followed by the NYSE composite, SPX, and DJI, closed up +1.04%, +1.03%, and +0.65%, respectively.  Market breadth and volume were both more positive than on Friday.  All market segments gained at least +0.17%.  Financials again led with a gain of +1.91%.  Other leaders were technology and oil and gas, which added at least +1.19%.  Laggards were telecommunications, consumer goods, and health care. 

From its prior 1244.28 close, the SPX gapped quickly to nearly 1260 and traded to an intraday high of 1266.73 before 11:00.  The index found resistance there, fell back slightly and again tested 1265 in early afternoon.  The report of S&P’s planned negative credit watch action sent all indexes substantially lower at about 1:30.   Indexes seemed about to repeat Friday’s reversals, but support held, and indexes strengthened from these session lows into the close. 

Trading desks suggested that the S&P news tempered optimism that the Eurozone will finally resolve its issues, they reported a quiet session that continues to be heavily influenced by macro-headlines from the Fed, Treasury, Congress and the executive as well as Eurozone and China.  Overall, there continues to be optimism that the rally will extend into next week.

In Asia, on mixed volumes, Asian equity markets closed moderately lower.  In Tokyo, the NKY fell -1.39%.  Volume rose +18.3%.  In Hong Kong, the Hang Seng fell -1.24%, on a -21.9% decrease in volume.  The Shanghai composite fell -0.31% on a -12.4% decrease in volume.  Commentary focused on yesterday’s S&P warning that it may downgrade sovereign credit ratings of 15 Eurozone countries and concerns that China will extend real estate curbs.

In Japan, the NKY closed at 8,575.16, down from 8,695.98 at the prior close.  The NKY closed +1.01% above its 20-day moving average, but down -16.2% for the year.  The index opened lower, but near its 8,671.54  intraday high, but trended lower through the day to close near its 8,571.09 intraday low.  Most market segments closed lower.  Health care closed up +0.17%.  Other leaders were oil and gas and consumer services, which closed off at least -0.83%.  Laggards were industrials, financials, and basic materials, which closed off at least -1.73%.

In China, the Hang Seng Index closed at 18,942.23, down from 19,179.69 at the prior close.  The index gapped lower and opened just below its 19,038.50 intraday high, traded lower to its mid-day intraday low of 18,818.70, and then strengthened slightly into the close.  Volatility rose +2.61% .  The index ended +1.19% and +2.05% above its respective 20-day and 50-day moving averages.  Most market segments closed lower.  Technology managed a gain of +0.59%.  Other leaders were consumer goods and basic materials, which lost at least -0.36%.  Financials lost -1.28%.  Laggards were telecommunications, industrials, and consumer services, which lost at least -1.70%.

In Shanghai, the SHCOMP closed at 2,325.91, down from 2,333.23 at the prior close.  The index opened at 2,326.66, but trended lower to a mid-afternoon intraday low of 2,310.16, before strengthening in the final two hours of the session.  The SHCOMP closed -4.29% and -4.13% below its respective 20-day and 50-day moving averages.  Most market segments closed lower.  Leaders were oil and gas, technology, and utilities, which closed up at least +0.32%.  Laggards were health care, financials, and telecommunications, which closed off at least -0.45%.

In Europe, equities are mixed, despite a German October factory order revision upward to +5.2% from -4.3% prior and survey +1.0%.  Also, final 3Q2011 GDP was revised to +3.0%from +2.9%.  Financials are middling performers.  Commentary focuses on reports that S&P will put 15 Eurozone countries on negative credit watch.  Relevant CDS are slightly wider this morning.  The Euro Stoxx 50 and DAX are down -0.40% and -0.80%, respectively, while the FTSE is up +0.19%.   Compared to the prior day’s 2,369.39 close, the Euro Stoxx 50 trades at 2,359.43, compared to an intraday low of 2,342.65 and intraday high of 2,372.41.  The index is +5.26% and +3.83% above its respective 20- and 50-day moving averages.  Market segments are mixed.  Leaders are health care, oil and gas, and technology, up at least +0.10%.  Financials are -0.09% lower.  Basic materials, consumer services, and utilities lag with losses of at least -0.56%.

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 0.15000%, up from 0.14950% Monday, but below the 0.25188% year-end level.  USD 3-month LIBOR rose to 0.53775%, up from 0.53390% the prior day and compared to 0.30281% at year-end 2010.
  • The US Libor-OIS (LOIS) spread rose to 43.9 bps, the year’s high, up from 43.0 bps the prior day, and compares to 12.0 bps at the end of 2010.  Euribor-OIS rose to 99.1 bps from 98.9 bps Monday, 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 is 10.0 bps, unchanged from 10.0 bps Monday, but well off from the August 2nd high of 33 bps.
  • U.S. Treasury yields are higher, with 2- and 10-year maturities yielding 0.258% and 2.079%, respectively, compared to 0.258% and 2.044% Monday.  The yield curve widened to +1.821%, compared to +1.786% Monday.  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 little changed compared to the euro, yen, and pound.  The dollar trades at US$78.571, compared to US$78.570 the prior day, and above its US$77.677 50-day, US$76.418 100-day, and US$75.784 200-day averages.  The euro trades at US$1.3410, compared to US$1.3401 Monday and US$1.3391 the day prior.  The euro trades worse than its US$1.3613 50-day and US$1.3875 100-day averages.  In Japan, the dollar trades at ¥77.71, compared to ¥77.82 Monday and ¥77.99 the prior day.  The yen trades worse than its 50-day moving average ¥77.155.
  • Commodities prices are mixed, with higher energy, lower precious metals, unchanged aluminum, lower copper, and lower agriculture prices.

Volatility, Skew:

  • The VIX ended at 27.84, up +1.16% from 27.52 at the prior close.  The VIX is -11.0% below its 20-day moving average 31.27.
  • The Euro Stoxx 50 volatility index (V2X) is up +2.18% to 36.67 from 35.97 the prior day.  The V2X index trades -6.42% below its 39.28 20-day moving average, -17.8% below the 44.69 30-day high, and +29.8% above the 28.29 30-day low.
  • The Hang Seng volatility index (VHSI) rose +2.61% to 29.08 from 28.34 the prior day.  The VHSI index trades +2.61% above its 33.24 20-day moving average.
  • CBOE skew fell -0.15% to 116.14 from 116.31 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 December IBD/TIPP economic optimism report reports, with an expected survey reading of 42.0, up from prior 40.6.

Overseas news:  Last evening, Standard & Poor’s placed 15 of 17 Eurozone countries, including all AAA-rated sovereigns, on credit watch negative and indicatedg France may receive up to a two notch downgrade.  In October, German factory orders increased the most in 19 months, rising 5.2% compared to a 1.0% estimated gain.  Today, Fitch said China may be at risk for a property price correction, which could lead to worsening loan portfolios for the country’s banks. 

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 12.7x estimated 2011 earnings ($99.12) and 11.5x estimated 2012 earnings ($108.92), compared to 12.6x and 11.4 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 +1.5%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.9% and +28.5%, respectively. 

Large-cap banks trade at a median 1.22x tangible book value, and 10.9x and 9.6x 2011 and 2012 consensus earnings, respectively, compared to 1.20x tangible book value and 10.8x/9.4x 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, and equity options markets are neutral.  The composite put/call ratio closed at 0.97, compared to 0.98 the prior day and in between its 5- and 10-period moving averages of 0.94 and 1.02, respectively.  The index put/call ratio closed at 1.25, compared to 1.34 the prior day and below the 5- and 10-period moving averages of 1.28 and 1.42, respectively.  The equity put/call ratio closed the day at 0.68, compared to 0.59 the prior day and above its 5- and 10-period moving averages of 0.62 and 0.66, respectively.   


NYSE Indicators.  Volume rose +2.29% to 892.77 million shares, from 872.80 million shares Friday, 0.88x the 1.019 billion share 50-day moving average.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +1,681 (compared to +630 the prior day), or 3.48:1.  Up volume led down volume by 5.98:1.

SPX.  On higher volume, the SPX rose +12.80 points , or +1.03%, to end at 1257.08.  Volume rose +2.70% to 682.85 million shares, up from 664.90 million shares Friday but below the 783.26 million share 50-day moving average.  For the 79th straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1212.67 vs. 1264.52, respectively)The SPX closed above its 200-week moving average (1135.38) for the 41st straight session. 

From its prior close at 1244.28, the SPX gapped higher at the open to the 1258 and rose to the 1265 level by 10:30.  The index traded in a narrow three point range through 1:30, setting the intra-day high of 1266.73 at 12:54.  At 1:40, news reports suggested Standard & Poor’s was placing all Eurozone nations on credit watch negative.  The index sold off on the news, falling to 1255 buy 2:05 and to the intra-day low at 1250 at 3:30.  A rebound into the close retook 1255, and the index closed in the middle 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 89th straight session but above 1200 for the fourth third straight session.  The index closed above 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 7thThe SPX closed (by +2.49%) above its 20-day moving average (1226.50) for the fourth straight session.  The index closed (by +3.66%) above its 50-day moving average for the fourth straight session.  The index closed (by +3.64%) above its 100-day moving average (1212.96) for the fourth straight session.  The SPX closed -0.59% below its 200-day moving average, closing below that average for the 24th time in 25 sessions.  The 50-day moving average rose.  The directional momentum indicator is positive for the fourth straight session, and the trend is weak and stable.  Relative strength rose to 57.89 from 55.42, a neutral range.  Next resistance is at 1267.76; next support is at 1245.36.

BKX.  On lower volume, the KBW bank index rose +1.04 points, or +2.69%, to end at 39.63.  The index recorded its 85th straight close below the prior 52-week low of 42.70 from August 25, 2010 and finished below the 40-level for the 20th time in the last 21 sessions.  Volume fell -7.11% to 84.06 million shares, down from 90.50 million shares Friday and below the 99.62 million share 50-day average.  The BKX closed -7.79% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -31.61% and -28.76% 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 38.59, the BKX gapped higher to 39.04, setting the intra-day low.  Through 12:55, the index rallied fairly consistently, setting the intra-day high of 39.99.  At the 1:40pm news announcing S&P’s pending Eurozone sovereign credit actions, the BKX sold off.  The index reached 39.40 by 2:05 and 39.38 by 3:15.  The index rallied into the close to finish above 39.60 and in the middle of the day’s range. 

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 (37.86) crossed below the 100- and 200-day moving averages (39.02 and 44.59, respectively) on April 25th and June 16th.  The 20-day closed (by -0.10 points) below the 50-day for the second straight session, and the gap expanded.  The 50-day moving average closed (by -6.73 points) below the 200-day moving average for the 123rd straight session, but the gap narrowed.  The 100-day moving average closed (by -5.57 points) below the 200-day moving average for the 101st straight session, and the gap held steady.  The BKX closed (by +4.94%) above its 20-day moving average for the fourth straight session.  The index closed (by +4.67%) above its 50-day moving average for the fourth straight session.  The index closed (by +1.55%) above the 100-day moving average for the 25th straight session and (by -11.13%) below its 200-day moving averages for the 130th consecutive session.  The index closed below 50.0 for the 130th straight session and below the 40.0 level for the 20th time in 21 sessions.  The directional movement indicator is positive for the fourth straight session, and the trend is weak and increasing.  Relative strength rose to 57.71 from 53.93, a neutral range.  Next resistance is 40.10; next support at 39.04.