This morning. U.S. equity markets are in a confirmed uptrend, which began on November 28th, when the SPX opened at 1158.67. The SPX 50-day moving average has trended higher since October 13th. Yesterday, the SPX, DJI, and Nasdaq closed above their respective 20-, 50-, 100-, and 200-day moving averages. The NYSE composite indexes closed -2.03% below its 200-day moving average. Overnight, Asian markets closed mixed, with losses in Tokyo and Hong Kong, but a strong positive reversal in Shanghai on reports that the government was purchasing bank shares, liquidity injections, and additional policy actions expected over the week end. European bourses are moderately higher ahead of the U.S. employment report. The dollar is mixed. U.S. equity options markets suggest a neutral short-term outlook. Commodities prices are mixed. U.S. Treasury yields are higher, with the 10-year at 2.003%, up from 1.995% the prior day. U.S. repo rates are at 3 bps. There are indications that the ECB’s new bank lending facilities have begun to ease interbank lending problems. Overnight and 3-month LIBO remain elevated. Euribor-OIS spreads are near 2011 highs. But the 3-month Euro basis swap fell below -100 bps for the first time since October 31st.
After a strong December employment report, U.S. equity futures are moderately higher. After a fair value adjustment of +3.16 points, March SPX equity futures are at 1280.80, up +4.54 points. The SPX opens at 1281.06, -6.05% below its April 29, 2011, multi-year 1363.61 closing high, +2.73% and +3.32% above its respective 20- and 50-day moving averages and +5.87% and +1.78% above its respective 100- and 200-day moving averages. Next resistance is at 1287.65. Next support is at 1269.86.
Thursday. U.S. stocks reversed large early losses and ended mixed. The Nasdaq scored the best gain, up +0.81%, followed by the SPX, up +0.29%, but the DJI and NYSE composite closed down -0.02% and -0.16%, respectively. Technically, the day was again positive, as the Nasdaq closed above its 200-day moving average. Volume rose, but remained under the 50-day moving average. Market breadth was positive. Market segments were mixed, led by financials, technology, and consumer services, which closed up at least +0.45%. Laggards were basic materials, telecommunications, and oil and gas, which closed off at least -0.32%.
Index initially traded lower. From the prior day’s 1277.30 close, the SPX traded quickly to an early 1265.26 intraday low, but buyers stepped in and rapidly overwhelmed the selling pressure. Markets reversed, and the SPX climbed back to par by early afternoon. The 1283.05 intraday high came in mid-afternoon, and the SPX traded sideways into the close.
Trading desks reported trading was balanced between buyers and sellers, but noted rotation into financials, with the money center banks, particularly BAC and JPM, performing particularly well.
In Asia, equity markets closed mixed, lower in Tokyo and Hong Kong, but up in Shanghai. Volume was mixed. The NKY closed down -1.16%, on a +30.4% increase in volume. The HSI closed down -1.17% on +38.6% increase in volume. After a positive reversal from a new 3-year low, the SHCOMP closed up +0.70% on a -13.9% decrease in volume. Nonetheless, the SHCOMP concluded its 9th consecutive weekly loss. After a poor 2011, these indexes are at levels comparable to March 2009 and well below their 200-day moving averages. Commentary focused on Euro weakness and concerns that the Eurozone sovereign debt crisis is worsening. Media reports attributed the SHCOMP rally to government purchases of bank stocks and expected imminent policy actions to stimulate economic growth. China’s central bank suspended bill sales until after the lunar new year in late January, which will increase market liquidity. Bloomberg reports that bank reserve requirements will be cut this weekend.
In Japan, the NKY closed at 8,390.35, down from 8,488.71 at the prior close. The index closed -1.14%% and -1.94% below its respective 20- and 50-day moving averages. The index opened at 8,490, but immediately traded lower and trended lower through mid-afternoon to an intraday low of 8,349.33. The index rallied in the final hour. An attempted late rally trailed off into the close. All market segments closed lower. Leaders were consumer services, utilities, and financials, which closed off at least -0.23%. Laggards were industrials, oil and gas, and basic materials, which closed down at least -1.50%.
In China, the Hang Seng closed at 18,593.06, downfrom 18,813.41 the prior day’s close. The index opened at its 18,785, but quickly traded lower to 18,550 by mid-morning, twice testing support at 18,500, with an intraday low of 18,506.58. The afternoon trade was somewhat stronger, trending back to 18,600. The index +0.26% above and -1.18% below its respective 20- and 50-day moving averages. Among market segments, only oil and gas rose, up +2.49%. Other leaders were utilities and consumer services, which closed off -0.05%. Financials closed off -1.64%. Laggards were consumer goods, industrials, and basic materials, which closed off at least -2.06%. In Shanghai, the SHCOMP closed at 2,163.40, up from 2,148.45 the prior day. The SHCOMP closed -2.52% and -8.05% below its respective 20- and 50-day moving averages. The index opened higher, but found mid-morning resistance at 2,160. The index traded back to a mid-afternoon intraday low of 2,133.75, then reversed and rallied strongly into the close, ending just below its 2,164.32 intraday high. Most segments closed higher. Leaders were oil and gas, basic materials, and telecommunications, with gains of at least +0.97%. Financials gained +0.67%. Laggards were consumer services and consumer goods, which closed up at least +0.12%. Health care lost -0.81%.
In Europe, equity indexes are moderately higher at mid-day, but without great conviction ahead of the U.S. December employment report. The Euro Stoxx 50, FTSE, and DAX are up +0.64%, +0.59%, and +0.44%, respectively. Commentary focuses on U.S. employment expectations, but probably have responded, too, to the Chinese market activities. Compared to the prior day’s 2,315.75 close, the Euro Stoxx 50 trades at 2,325.75, compared to a 2,354.68 intraday high and 2,308.87 intraday low. The index is +1.90% and +2.03% above its respective 20- and 50-day moving averages. Most market segments are higher. Leaders are utilities, oil and gas, and telecommunications, which are up at least +1.09%. Laggards are financials, up +0.24%, and consumer goods and basic materials, off at least -0.04%.
Libor, LOIS, Currencies, Treasuries, Commodities:
- Interbank lending rates continue to reflect substantial stress, centered on the health and liquidity of Eurozone banks in the current economic environment. USD LIBOR fell to 0.14900% from 0.14950% the prior day, but below the 0.25188% year-end 2010 level. USD 3-month LIBOR is 0.58150%, down from 0.58250% the prior day and 0.30281% at year-end 2010.
- The US Libor-OIS (LOIS) spread rose to 50.20 bps, from 50.05 bps the prior day, and compares to 12.0 bps at the end of 2010. Euribor-OIS eased to 93.35 bps, from 94.40 bps Tuesday, and 40.6 bps at the end of 2010. A rise in the LOIS indicates an increased intra-bank lending risk premium.
- The Euro 3-month basis swap improved to -98.38 bps from -109.05 bps the prior day, and a trough of -147 bps on December 14th.
- The U.S. government overnight repo rate is 3.0 bps, unchanged from 3.0 bps Wednesday, and well off from the August 2nd high of 33 bps.
- U.S. Treasury yields are slightly lower at the long end of the curve, with 2- and 10-year maturities yielding 0.260% and 2.007%, respectively, compared to 0.259% and 1.995% Wednesday. The yield curve widened to +1.740%, compared to +1.735% 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 weaker against the euro and British pound, but unchanged compared to the Japanese yen. The dollar trades at US$80.872, compared to an intraday high of $81.062 and US$80.090 at the prior day’s close, and above its US$78.898 50-day, US$77.730 100-day, and US$76.215 200-day averages. The euro trades at US$1.2799 compared an intraday low of US$1.2764 and US$1.2788 Thursday and US$1.2943 the day prior. The euro trades worse than its US$1.3317 50-day and US$1.3582 100-day averages. In Japan, the dollar trades at ¥77.12 compared to ¥77.12 Thursday and ¥76.72 the prior day. The yen trades better than its 50-day moving average ¥77.62.
- Commodities prices are mostly higher, with higher energy, mixed precious metals, lower aluminum and copper, and higher agriculture prices.
- The VIX ended at 21.48, down -3.33% from 22.22 at the prior close. The VIX is -10.8% below its 24.09 20-day moving average.
- The Euro Stoxx 50 volatility index (V2X) is down -3.68% to 29.87 from 31.02 the prior day. The V2X index trades -20.2% below its 37.42 20-day moving average, -28.8% below the 41.96 30-day high, and +5.37% above the 28.35 30-day low.
- The Hang Seng volatility index (VHSI) rose to 24.66, up +4.85% from 23.52 the prior day. The VHSI index trades -7.40% below its 26.63 20-day moving average.
- CBOE skew rose +0.11% to 117.76, from 117.63 at the prior day’s close and within 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:
· ICSC chain store sales rose +3.5% in December, compared to 4.0% survey and 3.2% prior.
· December nonfarm payrolls rose +200K, compared to 155K survey and 120K prior.
· The change in private payrolls was +212K, compared to 178K survey and 140K prior.
· The change in manufacturing payrolls was +23K, compared to 6K survey and 2K prior.
· The unemployment rate was 8.5%, compared to survey 8.7% and 8.6% prior.
Overseas news: According to press reports, Greece will finalize “haircut” talks with private sector sovereign debt holders by January 16th, the day the government begins a new round of talks with the “Troika” of European Commission, European Central Bank, and IMF bailout overseers. Today, Hungary’s government agreed to revisit a controversial central banking law which has alienated international rescue institutions from providing financial assistance to the country. In December, Eurozone economic confidence declined slightly to 93.3 from 93.7 but was in-line with estimates. Today, China’s central bank said it would suspend further bill sales until after the Lunar New Year to help inject cash into money markets, fueling further speculation of an imminent bank reserve rate requirement cut.
Company news/ratings changes:
· XL – removed from Top Picks but remains a buy at Citi, $24 price target
· STI – upgraded to outperform at Macquarie
· STI – upgraded to outperform at Oppenheimer, $24 target
· PNC – downgraded to neutral at Oppenheimer
· GS – downgraded to neutral at Wells Fargo
3Q2011 Earnings. The third quarter’s earnings reports surprised expectations. Of the 492 S&P500 companies that reported earnings to date, 73% (358 out of 492) 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 +14.7% 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 12.2x estimated 2012 earnings ($105.36) and 10.9x estimated 2013 earnings ($117.78), compared to 12.1x and 10.8 respective 2011-12 earnings yesterday. The 10-year average median Price/Earnings multiple is 20.0x. Since the beginning of 2012, analysts changed 2012 and 2013 earnings estimates by -3.1%, and +0.0%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +10.9% and +24.0%, respectively.
Large-cap banks trade at a median 1.31x tangible book value, and 12.3x and 10.4x 2011 and 2012 consensus earnings, respectively, compared to 1.30x tangible book value and 11.9x/10.2x 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 2012 and 2013 BKX earnings to exceed 2011 operating earnings by +4.9% and +7.0%, respectively.
Options. Options markets are neutral. Composite options markets are neutral, index options markets are neutral, and equity options markets are neutral to bearish. The composite put/call ratio closed at 0.81, compared to 0.94 the prior day and below its 5- and 10-period moving averages of 0.89 and 0.93, respectively. The index put/call ratio closed at 1.09, compared to 1.25 the prior day, and below the 5- and 10-period moving averages of 1.25 and 1.27, respectively. The equity put/call ratio closed the day at 0.62, compared to 0.76 the prior day and below its 5- and 10-period moving averages of 0.65 and 0.67, respectively.
NYSE Indicators. Volume rose +9.13% to 828.79 million shares, 0.92x the 50-day moving average, from 759.44 million shares Wednesday. Market breadth was positive, and up volume exceeded down volume. Advancing stocks led decliners by +656 (compared to -75 the prior day), or 1.55:1. Up volume led down volume by 1.37:1.
SPX. On lower volume, the SPX rose +3.76 points, or +0.29%, to end at 1281.06. Volume rose +7.78% to 661.12 million shares, up from 613.38 million shares Wednesday but below the 692.73 million share 50-day moving average. For the 9th consecutive day, the SPX closed above its 50-day moving average (1,239.88) and remained above its 200-day moving average (1,258.64), closing above that level for the 6th time in the past 8 days. For the 101st straight session, the SPX’s 50-day moving average closed below its 200-day moving average, but the 50-day average’s positive trend has narrowed the range considerably. The SPX closed above its 200-week moving average (1133.81) for the 62nd straight session.
From its prior close at 1,277.30, the SPX gapped lower to 1272 and fell to the intra-day low of 1265.26 at 10:00. Through 1:45, the index rallied, retaking its break-even line at 12:50 and reaching the intra-day high of 1283.05. The SPX retraced gains to the 1280 level and held there through the close to finish with a modest gain but at the high end of the day’s range.
The SPX closed above all major moving averages, above 1200 for the 24th straight session, but below 1300 for the 109th 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. After peaking on June 6th at 1317.97, the 100-day moving average crossed below the 200-day average on September 7th. On December 22nd, the 100-day set a low at 1202.28, and began an upward trend. For the 11th straight session, the SPX closed (by +2.73%) above its 20-day moving average (1247.04). The index closed (by +3.32%)above its 50-day moving average for the 11th straight session. The index closed (by +5.87%) above its 100-day moving average (1210.00) for the 25th straight session. The SPX closed +1.78% above its 200-day moving average for the 6th time in the past 8 sessions. The 20-, 50-, and 100-day moving averages rose. The directional momentum indicator was positive for the 10th straight session, but the trend is weak. Relative strength rose to 61.17 from 60.26, in the middle of a neutral range. Next resistance is at 1287.65; next support is at 1269.86.
BKX. On much higher volume, the KBW bank index rose +0.90 points, or +2.21%, to end at 41.71, its third straight close above 40 but its 106th straight close below its 2010 low. Volume rose +54.77% to 102.65 million shares, up from 66.33 million shares Wednesday, above the 84.98 million share 50-day average, and the highest non-options expiration volume day since November 30th’s large gains. The BKX closed -2.95% below its August 30, 2010, closing low of 42.98, the trough of the 2010’s correction, and -28.02% and -25.02% below its April 23, 2010 (the post-2008 high point), and February 14, 2011 (the most recent high point) respective closes.
Financials were the market’s best performing sector, and large-cap banks outperformed regionals. From its prior close of 40.81, the BKX gapped lower to 40.50 and set the intra-day low of 40.31 at 9:32. Importantly and for the second straight day, the BKX rallied above its intra-day low as the broader market was bottoming. By 10:30, the BKX retook its break-even line, almost 90 minutes prior to the SPX. Through 1:45, the index rallied on a strong and consistent trajectory, reaching the intra-day high of 42.09. Through 3:00, the index retraced gains back to 41.50, but a small rally at the close lifted the index back above 41.70. The index finished with a healthy gain and at the high end of the day’s mostly positive range.
Technical indicators are mixed, but improving. Bank stocks have lagged the market’s overall rebound from the October lows. Moving averages alignment is mixed, as the 20- and 50-day moving averages (38.66 and 38.95, respectively) moved above the 100-day moving average (37.98), and each average is rising. The 100-day moving average appears to have troughed, through the 200-day moving average (43.19) continues to trend lower. On December 16th, the 50-day average crossed above the 100-day moving average for the first time since April 25th. The 50-day remains below the 200-day moving average, as it has since June 16th. For the 6th time in the past 7 days, the 20-day closed (by +0.29 points) above the 50-day. The 50-day moving average closed (by -4.53 points) below the 200-day moving average for the 144th straight session, but the gap continues to narrow. The 100-day moving average closed (by -5.21 points) below the 200-day moving average for the 122nd straight session, but the gap is narrowing. The BKX closed (by +7.08%) above its 20-day moving average for the 13th time in the last 14 sessions. The index closed (by +7.89%) above its 50-day moving average for the 9th straight session. The index closed (by +9.81%) above the 100-day moving average for the 10th straight session. The index closed (by -3.43%) below its 200-day moving average for the 150th consecutive session. The index closed below 50.0 for the 151st straight session but above 40.0 for the third straight session. The directional movement indicator was positive for the 8th consecutive session, but the trend is weak. Relative strength rose to 64.31 from 60.82, in the middle of a neutral range. Next resistance is 42.43; next support at 40.65.