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U.S. Futures Rebound After Eurozone Accord, But Weaken on Adverse Corporate News

This morning.  U.S. equity markets remain in correction, pending some clear market follow-through to last Monday’s strong gains.  Most major indexes are above 20-, 50-, and 100-day moving averages. The exception is the Nasdaq, which closed below its 50-day moving average. Also, only the DJI closed above its 200-day moving average.
U.S. equity futures are up this morning, but off their highs, responding well to news that the Eurozone leaders’ summit had achieved several breakthroughs. European equity markets are about +1.5% higher and at intraday highs. The dollar is weaker, compared to the euro, yen, and pound.  U.S. equity options markets suggest a neutral short-term outlook.  Commodities prices are mixed.  U.S. Treasury yields are somewhat higher, with the 10-year again moving above 2.00%.  U.S. repo rates are unchanged at 3 bps.  Overnight and 3-month LIBO remain elevated.  Euribor-OIS spreads are near 2011 highs.  After a fair value adjustment of -2.20 points, March SPX equity futures are at 1234.00, up +6.00 points.  The SPX opens at 1234.35, -9.48% below its April 29 multi-year 1363.61 closing high, +0.69% above its 20-day and +1.35% above its 50-day moving averages.  The SPX is -1.85% below its 1257.64 year-end close.  Next resistance is at 1252.99.  Next support is at 1223.59.
Thursday.  Despite some positive pre-market U.S. employment news and ECB rate cut, equity markets were stung by a disappointing ECB news conference that suggested that it wouldn’t support additional lending to stress sovereigns and late in the day, indications of breakdowns between Eurozone negotiators, which sparked a sell-off in the final minutes. All major indexes closed lower, but only the Nasdaq saw an increase in volume. The NYSE composite lost -2.52%, followed by the SPX, Nasdaq, and DJI, which shed -2.11%, -1.99%, and -1.63%, respectively.
The SPX opened about -10 points lower at 1252, and trended lower without respite through 3:00, when a news report came through that European negotiators had come to agreement, a draft of which was leaked, followed shortly by German denials that it had approved the draft. The confusion and apparent rejection stifled any remaining optimism, and markets sold off sharply in the final quarter-hour. Market breadth was negative. All market segments closed at least -1.24% lower. Leaders were consumer goods, technology, and utilities, which closed down -1.49%. Oil and gas, basic materials, and financials closed off -2.53%.

As indicated by volumes, trading desks reported no panic selling, as investors seemed to give Europe the benefit of doubts.
In Asia, on mixed volumes, Asian equity markets closed lower.  In Tokyo, the NKY fell -1.48%.  Volume rose 56.3%.  In Hong Kong, the Hang Seng fell -2.73%, with a +27.7% increase in volume.  The Shanghai composite fell -0.62% on a -21.6% decrease in volume.  Commentary focused on the Eurozone concerns and slowing Chinese inflation, which signals weaker economic growth.
In Japan, the NKY closed at 8,536.46, down from 8,664.58 at the prior close.  The NKY closed +0.69% above its 20-day moving average, but down -16.6% for the year.  The index opened at 8,521.33, and trended lower to a mid-morning intraday low of 8,503.03.  The index strengthened to a mid-afternoon intraday high of 8,576.68, but weakened in the final hour. All market segments closed lower.  Leaders were utilities, oil and gas, and health care, which closed down at least -0.60%.  Laggards were industrials, telecommunications, and financials, which closed down at least -1.91%.
In China, the Hang Seng Index closed at 18,586.23, down from 19,107.81 at the prior close.  The index gapped lower to open at 18,721.20, and after a brief rally to an intraday high of 18,840.90, trended lower through late afternoon, before rallying mildly in the final minutes. Volatility rose +8.66%.  The index ended -0.35% and -0.31% below its respective 20-day and 50-day moving averages.  All market segments closed lower.  Leaders were utilities, telecommunications, and consumer services, which closed at least -1.04% lower. Laggards were financials, oil and gas, and technology, which lost at least -3.13%.
In Shanghai, the SHCOMP closed at 2,315.27, down from 2,329.82 at the prior close.  The index opened at 2,315.51, and also rallied early in the session to an intraday high of 2,331.26, but trended lower through most of the remaining session. The SHCOMP closed -3.70% and -4.24% below its respective 20-day and 50-day moving averages.  Most market segments closed lower.  Telecommunications and utilities closed up at least +0.63%. Financials lost -0.22%. Laggards were basic materials, consumer services, and consumer goods, which closed at least -1.17% lower.
In Europe, equities have rallied strongly after announcement early this morning of a “pact” or “accord” by 23 of 27 Eurozone nations. News reports also cite a $300 billion Chinese central bank fund, which will invest overseas. The Euro Stoxx 50, FTSE, and DAX are up +1.86%, +0.73%, and +1.71%, respectively.   Compared to the prior day’s 2,288.05 close, the Euro Stoxx 50 trades at 2,329.69, just off the intraday high of 2,336.99.  The index is +3.52% and +2.16% above its respective 20- and 50-day moving averages.  Market segments are all higher. Leaders are financials, consumer services, and basic materials, up at least +2.07%. Laggards are telecommunications, technology, and health care,  which are at least +0.42% higher.
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%, unchanged from 0.15000% Thursday, but below the 0.25188% year-end level.  USD 3-month LIBOR rose to 0.54175%, up from 0.54000% the prior day and 0.30281% at year-end 2010.
  • The US Libor-OIS (LOIS) spread rose to 45.1 bps, the year’s high, up from 43.6 bps the prior day, and compares to 12.0 bps at the end of 2010.  Euribor-OIS narrowed to 96.8 bps from 100.4 bps Thursday, 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 3.0 bps, unchanged from 3.0 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 0.222% and 2.012%, respectively, compared to 0.218% and 1.970% Thursday.  The yield curve widened to +1.790%, compared to +1.752% 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 lower against the euro, yen, and pound.  The dollar trades at US$78.508, compared to US$78.832 the prior day, and above its US$77.704 50-day, US$76.546 100-day, and US$75.815 200-day averages.  The euro trades at US$1.3406, compared to US$1.3341 Thursday and US$1.3412 the day prior day.  The euro trades worse than its US$1.3606 50-day and US$1.3846 100-day averages.  In Japan, the dollar trades at ¥77.67, compared to ¥77.64 Thursday and ¥77.63 the prior day.  The yen trades worse than its 50-day moving average ¥77.205.
  • Commodities prices are mixed, with higher energy, higher precious metals, lower aluminum and copper, and mixed agriculture prices.
Volatility, Skew:
  • The VIX ended at 30.59, up +6.70% from 28.67 at the prior close.  The VIX is -1.21% below its 20-day moving average 30.96.
  • The Euro Stoxx 50 volatility index (V2X) is down -8.18% to 36.17 from 39.38 the prior day.  The V2X index trades -6.55% below its 38.70 20-day moving average, -19.1% below the 44.69 30-day high, and +10.2% above the 28.29 30-day low.
  • The Hang Seng volatility index (VHSI) rose +8.66% to 32.26 from 29.69 the prior day.  The VHSI index trades -0.87% below its 32.54 20-day moving average.
  • CBOE skew fell -0.43% to 115.37 from 115.87 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.  Today’s economic reports include the October trade balance at 8:30 and at 9:55, the University of Michigan preliminary December confidence report.
Overseas news: Overnight, the European Council released a statement detailing an accord aimed at resolving the on-going sovereign debt crisis, including the following provisions: 23 of 27 European Union nations will adopt a new fiscal pact the coordinates economic policies, private bond holders will not be forced to take haircuts in future sovereign restructurings, the new Emergency Stabilization Mechanism’s launch will be accelerated to July 2012 but it will not be granted a banking license, and Europe will contribute up to €200 billion of additional resources to the IMF.  At last night’s E.U. summit, U.K. Prime Minister Cameron objected to and refrained from supporting the proposed EU treaty changes, signaling an increasing rift between the major European powers in the E.U. era.  Today, Moody’s downgraded French banks Sociéte Generale, BNP Paribas, and Credit Agricole by one notch each.  Today, the Bundesbank cut its 2012 German GDP forecast to +0.6% from +1.8% growth.   In October, German exports fell -1.0% over the prior month, missing expectations for an increase.  In November, China’s consumer price index increased at a slower pace, rising +4.2% over last year, lower than +4.5% estimates and less than the +5.5% and +6.5% increases from the month prior and the peak in July.
Company news/ratings changes:
·         None.
 
3Q2011 Earnings.  The third quarter’s earnings reports surprised expectations.  Of the 473 S&P500 companies that reported earnings to date, 73% (345 out of 473) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +4.5% (versus a historical average of +2%).  EPS is up +14.8% 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 12.5x estimated 2011 earnings ($99.14) and 11.3x estimated 2012 earnings ($108.92), compared to 12.7x and 11.6 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 1.20x tangible book value, and 10.7x and 9.3x 2011 and 2012 consensus earnings, respectively, compared to 1.23x tangible book value and 11.1x/9.7x 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 +30.2% and +53.8%, respectively.
Options.  Options markets are neutral.  Composite options markets are neutral, index options markets are bullish, and equity options markets are neutral.  The composite put/call ratio closed at 0.96, compared to 0.89 the prior day and above its 5- and 10-period moving averages of 0.93 and 0.96, respectively.  The index put/call ratio closed at 1.12, compared to 1.03 the prior day and below the 5- and 10-period moving averages of 1.13 and 1.24, respectively.  The equity put/call ratio closed the day at 0.77, compared to 0.74 the prior day and above its 5- and 10-period moving averages of 0.71 and 0.68, respectively.   
NYSE Indicators.  Volume fell -3.88% to 930.50 million shares, from 968.11 million shares Wednesday, 0.93x the 1.005 billion share 50-day moving average.  Market breadth was negative, and up volume lagged down volume.  Advancing stocks lagged decliners by -2,198 (compared to +172 the prior day), or 0.16:1.  Up volume lagged down volume by 0.03:1.
SPX. On lower volume, the SPX fell -26.66 points, or -2.11%, to end at 1234.35.  Volume fell -0.91% to 711.12 million shares, down from 717.63 million shares Wednesday and below the 771.57 million share 50-day moving average. For the 82nd straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1217.96 vs. 1263.64, respectively).   The SPX closed above its 200-week moving average (1135.27) for the 44th straight session. 
From its prior close at 1261.01, the SPX opened lower to 1255 and set the intra-day high of 1256 shortly after.  Through 1:15, the index declined, breaking through 1240 at 1:05 and hovering near that level through 3:10.  Another European headline head-fake at 3:15 drove temporary short-covering and the index reached 1246 by 3:35.  The headline was clarified and partially refuted, sending the index to its intra-day low of 1231.47 at 3:57.  The index closed just above the low and at the bottom end of the day’s negative range. 
Technical indicators are mostly negative.  The market returned to a correction following mid-November’s reversal.  The SPX closed below 1300 for the 92nd straight session but above 1200 for the seventh straight session.  The index closed above its April 2010 highs for the seventh straight session.  The 50-day moving average crossed above the 100-day moving average on December 6th, having been below that average since July 11th.  The 100-day moving average crossed the 200-day average to the downside on September 7th and the spread is still widening.  The SPX closed (by +0.69%) above its 20-day moving average (1225.89) for the seventh straight session.  The index closed (by +1.35%) above its 50-day moving average for the seventh straight session.  The index closed (by +1.93%) above its 100-day moving average (1211.01) for the seventh straight session.  The SPX closed -2.32% below its 200-day moving average, closing below that average for the 27th time in 28 sessions.  The 20- and 50-day moving averages rose.  The directional momentum indicator is positive for the seventh straight session, and the trend is weak and declining.  Relative strength fell to 51.43 from 58.68, a neutral range.  Next resistance is at 1252.99; next support is at 1223.59.
BKX.  On higher volume, the KBW bank index fell -1.56 points, or -3.93%, to end at 38.09.  The index recorded its 88th straight close below the prior 52-week low of 42.70 from August 25, 2010 and finished below the 40-level for the 23rd time in the last 24 sessions.  Volume rose +0.32% to 89.62 million shares, up from 89.34 million shares Wednesday but below the 98.02 million share 50-day average.  The BKX closed -11.38% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -34.27% and -31.53% below its April 23, 2010, and February 14, 2011 respective closes.
Financials were the market’s worst performing sector for the second time of the last three sessions, and large-cap banks underperformed regional banks.  From its prior close at 39.65, the BKX gapped lower to 39.32, setting the intra-day high.  Through 1:10, the index sold off, breaching 39.00 at 9:45 and 38.50 at 11:35 before settling at the 38.40 level.  A sell-off at 2:30 took the index lower to 38.15 before the false headline-driven rally lifted the BKX back to 39.60 by 3:35.  The headline was clarified and partially refuted, and the index sold off aggressively into the close, reaching the intra-day low of 37.95 at 3:56.  The index closed at the lowest end 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 (38.02) crossed below the 100- and 200-day moving averages (38.81 and 44.38, respectively) on April 25th and June 16th.  The 20-day closed (by -0.36 points) below the 50-day for the fifth straight session, and the gap expanded. The 50-day moving average closed (by -6.36 points) below the 200-day moving average for the 126th straight session, but the gap narrowed.  The 100-day moving average closed (by -5.57 points) below the 200-day moving average for the 104th straight session, and the gap expanded.  The BKX closed (by +1.14%) above its 20-day moving average for the seventh straight session.  The index closed (by +0.19%) above its 50-day moving average for the seventh straight session.  The index closed (by -1.86%) above the 100-day moving average for the first time in four sessions.  The index closed (by -14.17%) below its 200-day moving averages for the 133rd consecutive session.  The index closed below 50.0 for the 133rd straight session and below the 40.0 level for the 23rd time in 24 sessions.  The directional movement indicator is positive for the seventh straight session, and the trend is weak and stable.  Relative strength fell to 50.19 from 57.43, a neutral range.  Next resistance is 39.01; next support at 37.56.