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U.S. Futures Modestly Higher, as Volume, Participation Flag

This morning.  U.S. equity markets are in a confirmed uptrend. The uptrend began on November 28th when the SPX opened at 1158.67.  The SPX 50-day moving average has been trending higher since October 13th. Yesterday, only the Nasdaq closed below its 50-day moving average.  The DJI closed above its 20-, 50-, 100-, and 200-day moving averages.  Overnight, Asian markets closed higher on mixed volume.  Asian equity markets trade at their worst levels since 2009.  European bourses are moderately higher, but off their best levels of the day. In both markets, commentary focuses on strengthening economic reports. The dollar is slightly weaker against the Euro and other major currencies.  U.S. equity options markets suggest a neutral short-term outlook.  Commodities prices are mixed.  U.S. Treasury yields are slightly higher, with the 10-year at 1.962%, up from 1.948% Thursday.  U.S. repo rates are unchanged at 2 bps.  There are still no indications that the ECB’s new bank lending facilities have eased interbank lending problems.  Overnight and 3-month LIBO remain elevated.  Euribor-OIS spreads are near 2011 highs.
U.S. equity futures are moderately higher and strengthening. After a fair value adjustment of -0.50 points, March SPX equity futures are at 1255.80, up +7.20 points.  The SPX opens at 1254.00, -8.04% below its April 29 multi-year 1363.61 closing high, +1.94% and +1.74% above its respective 20- and 50-day moving averages.  The SPX is -0.29% below its 1257.64 year-end close.  Next resistance is at 1258.24, but the 1,259.38 200-day moving average is probably the more important level.  Next support is at 1246.74.
Thursday.  U.S. equity markets closed moderately higher, though volume fell. The NYSE composite, SPX, Nasdaq, and DJI closed up +0.98%, +0.83%, 0.83%, and +0.51%, respectively.  Most market segments closed higher.  Leaders were financials, basic materials, and oil and gas, up at least +1.12%. Laggards were consumer services and utilities, up at least +0.08%, and consumer goods, off -0.23%.
On mixed economic reports, markets rallied from the open through early afternoon, but traded sideways into the close. On the SPX, the 1255.22 intraday high came in the final half hour, but the range was narrow. Participation was clearly lessening as the holidays approach. Long-term treasury yields continued to rise.  Market volatility continued its recent decline.  Trading desks reported greater activity in the morning trade.  In addition to U.S. economic developments, commentary focused on the Eurozone LTRO, noting that Italian and Spanish banks were particularly large subscribers. Market technicals continue to improve. On the SPX, the next greatest resistance test is at 1260, the 200-day moving average, followed by 1294, 11.2% above the recent 1158.67 low on November 25th.  

In Asia,
equity markets were closed in Tokyo. Equities rose in China. Volumes rose in Hong Kong, but fell in Shanghai.  In Hong Kong, the Hang Seng rose +1.37%, on a -6.80 increase in volume.  The HSI is at its lowest level since June 2009.  The Shanghai composite rose +0.85%, its first gain in the past 5 trading days, on a -11.1% decrease in volume.  The SHCOMP closed at levels comparable to March 2009.  Commentary focused on the strengthen U.S. economic data.
In China, the Hang Seng Index closed at 18,629.17, up from 18,378.23 at the prior close.  The index gapped higher to open at 18,589.68 and traded within a narrow range until a late afternoon. The index closed just off its 18,636.75 intraday high. Volatility fell -1.54%.  The index ended +0.78% above and -0.79% below its respective 20-day and 50-day moving averages.  All market segments closed at least +0.06% higher. Leaders were basic materials, oil and gas, and technology, which closed at least +1.86% higher. Financials gained +1.40%. Laggards were consumer goods, utilities, and consumer services.
In Shanghai, the SHCOMP closed at 2,204.78, up from 2,186.30 at the prior close.  The index also opened slightly lower, but rallied through mid-day to an intraday high of 2,219.74. The index weakened in the afternoon session, trading back to support at 2,195 before rallying into the close. All market segments closed at least +0.45% higher. Leaders were utilities, consumer services, and basic materials, which closed up at least +1.11%. Laggards were oil and gas, financials, and health care.
In Europe, equity indexes are moderately higher at mid-day. The Euro Stoxx 50, FTSE, and DAX are up +0.86%, +1.02%, and +0.38%, respectively.  Commentary focuses on strengthening U.S. economic reports. Compared to the prior day’s 2,273.02 close, the Euro Stoxx 50 trades at 2,295.73, compared to a 2,298.47 intraday high.  The index is +1.13%  and +0.63% above its respective 20- and 50-day moving averages.  Most market segments are higher.  Leaders are oil and gas, consumer services, and industrials, with gains of at least +0.95%. Financials are up +0.45%. Laggards are telecommunications and basic materials, up at least +0.32%, and technology, off -0.03%.
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% the prior day, and below the 0.25188% year-end 2010 level.  USD 3-month LIBOR rose to 0.57375%, the highest of the year, unchanged from  0.57375% the prior day and 0.30281% at year-end 2010.
  • The US Libor-OIS (LOIS) spread rose to 48.57 bps, the year’s high, from 48.38 bps the prior day, and compares to 12.0 bps at the end of 2010.  Euribor-OIS rose to 97.70 bps, a new high, from 96.55 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 2.0 bps, unchanged from 2.0 bps Thursday, and well off from the August 2nd high of 33 bps.
  • U.S. Treasury yields are slightly higher at the longer end of the curve, with 2- and 10-year maturities yielding 0.279% and 1.967%, respectively, compared to 0.275% and 1.948% Thursday.  The yield curve widened to +1.688%, compared to +1.673% 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, weaker against the yen, and unchanged versus the British pound.  The dollar trades at US$79.808, compared to an intraday low of $79.728 and US$79.964 at the prior day’s close, and above its US$78.104 50-day, US$78.040 100-day, and US$75.994 200-day averages.  The euro trades at US$1.3076, compared an intraday high of US$1.3096 and US$1.3050 Thursday and US$1.3047 the day prior.  The euro trades worse than its US$1.3507 50-day and US$1.3720 100-day averages.  In Japan, the dollar trades at ¥78.03, compared to ¥78.17 Thursday and ¥78.06 the prior day.  The yen trades worse than its 50-day moving average ¥77.43.
  • Commodities prices are mixed, with mixed energy, higher precious metals, aluminum and copper, and agriculture prices.
Volatility, Skew:
  • The VIX ended at 21.16, down -1.26% from 21.43 at the prior close.  The VIX is -21.5% below its 20-day moving average 26.94.
  • The Euro Stoxx 50 volatility index (V2X) is down -0.79% to 28.65 from 28.87 the prior day.  The V2X index trades -23.5% below its 37.42 20-day moving average, -33.3% below the 42.93 30-day high, and +1.04% above the 28.35 30-day low.
  • The Hang Seng volatility index (VHSI) fell -1.54% to 23.63 from 24.00 the prior day.  The VHSI index trades -16.9% below its 28.44 20-day moving average.
  • CBOE skew rose +0.35% to 115.56 from 115.16 at the prior day’s close and near the bottom of 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 reporting includes revised and final 3Q2011 GDP and personal consumption, as well as the latest week’s initial and continuing jobless claims.  The GDP and personal consumption revisions disappointed.  GDP was revised lower to 1.8% from 2.0% prior and survey.  Personal consumption was revised to +1.7%, from 2.3% prior and survey.  Initial claims improved to 364K from 366K prior and compares to 380K survey.  Continuing claims fell to 3546K, compared to 3603K prior and 3600K survey.
Overseas news: According to Reuters, Standard & Poor’s will not release its Eurozone sovereign ratings decisions until January at the earliest.  Today, Moody’s maintained Austria’s AAA credit rating and stable outlook.  In the third quarter, France’s GDP was revised down to +0.3% growth over the prior quarter, down from +0.4% prior. 
Company news/ratings changes:
·         None.
3Q2011 Earnings.  Third quarter’s earnings reports beat expectations.  Of the 492 S&P500 companies that reported earnings to date, 73% (356 out of 498) beat operating EPS estimates, versus the historical average of 62%.  In aggregate, companies beat EPS expectations by an average of +4.3% (versus a historical average of +2%).  EPS is up +14.7% 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 ($98.89) and 11.5x estimated 2012 earnings ($108.70), 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 +4.5%, and +1.3%, respectively.  Analysts expect 2011 and 2012 earnings to exceed 2010 earnings ($84.78) by +16.6% and +28.2%, respectively. 
Large-cap banks trade at a median 1.26x tangible book value, and 11.6x and 10.1x 2011 and 2012 consensus earnings, respectively, compared to 1.24x tangible book value and 11.5x/9.8x 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 +29.5% 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 0.99, compared to 1.08 the prior day and above its 5- and 10-period moving averages of 0.98 and 1.05, respectively.  The index put/call ratio closed at 1.32, compared to 1.44 the prior day, in between the 5- and 10-period moving averages of 1.30 and 1.35, respectively.  The equity put/call ratio closed the day at 0.67, compared to 0.73 the prior day and below its 5- and 10-period moving averages of 0.69 and 0.73, respectively.
NYSE Indicators.  Volume fell -6.03% to 774.60 million shares, from 824.30 million shares Wednesday.  Market breadth was positive, and up volume led down volume.  Advancing stocks led decliners by +1,201 (compared to +695 the prior day), or 2.44:1.  Up volume led down volume by 3.14:1.
SPX. On lower volume, the SPX rose +10.28 points, or +0.83%, to end at 1254.00.  Volume fell -14.07% to 615.13 million shares, down from 715.86 million shares Wednesday and below the 738.63 million share 50-day moving average. For the 92nd straight session, the SPX’s 50-day moving average closed below its 200-day moving average (1232.59 vs. 1259.38, respectively). The SPX closed above its 200-week moving average (1134.10) for the 54th straight session. 
From its prior close at 1243.72, the SPX opened higher to 1246 and set the intra-day low of 1245.15 at 9:35.  The index rallied above 1250 by 10:00 and fluctuated at the level through noon.  From noon through 12:45, the index rallied to 1254 and held that level into the close to finish at the high end of the day’s positive range. 
Technical indicators are mostly negative.  The market returned to a confirmed uptrend following December 20th’s strong gains in higher and above average volume.  The SPX closed below 1300 for the 102nd straight session but above 1200 for the 17th 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 below the 200-day average on September 7th and the spread is still widening.  The SPX closed (by +1.94%) above its 20-day moving average (1230.11) for the third straight session.  The index closed (by +1.74%) above its 50-day moving average for the third straight session.  The index closed (by +4.25%) above its 100-day moving average (1202.88) for the 17th straight session.  The SPX closed -0.43% below its 200-day moving average, closing below that average for the 36th time in 37 sessions.  The 20-, 50-, and 100-day moving averages rose.  The directional momentum indicator is positive for the second straight session, and the trend is weak and declining.  Relative strength rose to 56.42 from 54.06, a neutral range.  Next resistance is at 1258.24; next support is at 1246.74.
BKX.  On higher volume, the KBW bank index rose +1.09 points, or +2.82%, to end at 39.68.  The index recorded its 98th straight close below the prior 52-week low of 42.70 from August 25, 2010 and finished below the 40-level for the 33rd time in the last 34 sessions.  Volume rose +4.99% to 87.14 million shares, up from 83.00 million shares Wednesday but below the 92.90 million share 50-day average.  The BKX closed -7.68% below its August 30, 2010 closing low of 42.98, the trough of the last year’s correction, and -31.53% and -28.67% below its April 23, 2010, and February 14, 2011 respective closes.
Financials were the market’s best performing sector, and outperformed the market, and large-cap banks outperformed regional banks.  From its prior close at 38.59, the index opened higher to 38.75, setting the intra-day low.  The index rallied through 10:30, reaching 39.40 and traded flat through noon.  From noon through 2:00, financials rallied again and reached 39.80.  At 2:35, the index set its intra-day high of 39.86.  A sell-off at 3:00, inspired by a one-notch ratings downgrade of Goldman Sachs, brought the index back to 39.60, and the BKX traded at the level into the close to finish at the high end of the day’s positive range.
Technical indicators are mostly negativeBank stocks have lagged the market’s overall rebound from the October lows.  Moving averages align bearishly, as most shorter duration averages are below the longer duration averages and most moving averages are falling.  On December 16th, the 50-day average (38.37) crossed above the 100-day moving average (37.95) for the first time since April 25th.  The 50-day remains below the 200-day moving averages (43.65), as it has since June 16th.  The 20-day closed (by -0.45 points) below the 50-day for the 15th straight session, but the gap narrowed.  The 50-day moving average closed (by -5.29 points) below the 200-day moving average for the 136th straight session, but the gap narrowed.  The 100-day moving average closed (by -5.70 points) below the 200-day moving average for the 114th straight session, but the gap narrowed.  The BKX closed (by +4.65%) above its 20-day moving average for the fifth time in the last seven sessions.  The index closed (by +3.43%) above its 50-day moving average for the second straight session.  The index closed (by +4.55%) above the 100-day moving average for the third straight session.  The index closed (by -9.10%) below its 200-day moving averages for the 143rd consecutive session.  The index closed below 50.0 for the 143rd straight session and below the 40.0 level for the 33rd time in 34 sessions.  The directional movement indicator switched to positive for the first time in four sessions, and the trend is weak and decreasing.  Relative strength rose to 57.66 from 53.11, a neutral range.  Next resistance is 40.11; next support at 39.00.