This morning. U.S. equity markets are in a confirmed uptrend. The uptrend began on November 28th, when the SPX opened at 1158.67, but the SPX 50-day moving average has trended higher since October 13th. Yesterday, the NYSE composite recovered its 200-day moving average, joining the SPX, DJI, NYSE composite, and Nasdaq above their respective 20-, 50-, 100-, and 200-day moving averages. Overnight, Asian equity markets closed higher, on views that Chinese monetary authorities will ease policy with the Chinese New Year. European exchanges are modestly higher, after strong sovereign debt auctions in France and Portugal. The dollar is slightly weaker. U.S. equity options markets suggest a neutral to bearish short-term outlook. Commodities prices are mostly higher. U.S. Treasury yields are lower, with the 10-year at 1.891%, down from 1.898% the prior day. U.S. repo rates are at 18 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, and Euribor-OIS spreads remain near 2011 highs, but are trending lower. Also, the 3-month Euro basis swap is now at its best levels since August 18th.
U.S. equity futures are slightly higher and near pre-market highs. After a fair value adjustment of +1.64 points, March SPX equity futures are at 1308.00, up +4.16 points. The SPX opens at 1308.04, -4.08% below its April 29, 2011, multi-year 1363.61 closing high, but +2.95% and +4.96% above its respective 20- and 50-day moving averages and +7.21% and +4.01% above its respective 100- and 200-day moving averages. Next resistance is at 1313.77. Next support is at 1296.65.
Wednesday. Equities extended recent gains, closing near the day’s highs. The Nasdaq, NYSE composite, DJI, and SPX rose +1.53%, +1.26%, +1.11%, and +0.78%, respectively. All market segments closed at least +0.02% higher, led by financials, which rose +1.66%. All indexes closed above their 20-, 50-, 100-, and 200-day moving averages. Market breadth was positive. Volatility declined sharply. Volumes remain light, below the 50-day moving average and signaling that many investors remain sidelined. Trading desks report continued rotation into higher beta segments, as indicated in the outperformance of financials in recent weeks.
The market’s strength continues to surprise many investors. Yesterday’s strength was propelled by news of likely “voluntary” agreements on Greek debt default and better than expected earnings from Goldman Sachs, which rose +6.79% on the day. On the whole, earnings season is mixed.
Technically, the session was positive. From its prior day’s 1293.67 close, the SPX traded briefly lower, then rallied strongly above 1300, which immediately proved a support rather than resistance level. After a brief mid-morning test of 1300 support, the SPX rallied through the afternoon to close just short of the 1308.11 intraday high, and its first close above 1300 since July 27th. Support is seen at 1293, the October highs, and 1258, the 200-day moving average. Resistance is 1312. Sentiment is improving, but investors remain cautious. Trading desks report some mutual fund “chasing” into yesterday’s close.
In Asia, equity markets closed higher as Chinese monetary authorities signaled their inclination to ease. Volumes fell. In Japan, the NKY closed up +1.04% on a +11.8% increase in volume. In Hong Kong, the HSI rose +1.30% on a +91.1% increase in volume. In Shanghai, the SHCOMP rose +1.31% on a +91.6% increase in volume. Commentary focused on the likelihood that China will ease monetary policy with the Chinese New Year.
In Japan, the NKY closed Thursday at 8,639.68, compared to 8,550.58 the prior day. The index closed +2.44% and +1.76% above its respective 20- and 50-day moving averages. The index opened just below 8,600 and traded to an intraday high of 8,668.94 in the morning session, and traded sideways to slightly lower into the close. Most market segments closed higher. Leaders were basic materials, industrials, oil and gas, and technology, which closed up at least +1.87%. Financials rose +1.44%. Laggards were consumer services, utilities, and telecommunications, which closed down at least -0.51%.
In China, the Hang Seng closed at 19,942.95, up from 19,686.92 at the prior day’s close. The index gapped higher to open just below 19,850, to a mid-morning intraday high of 19,956.54. During the afternoon session, the index twice tested support at 19,850, and traded higher into the close. The index closed +6.20% and +6.39% above its respective 20- and 50-day moving averages. Market segments were mixed. Leaders were financials, industrials, and consumer goods, which gained at least +1.06%. Laggards were technology, oil and gas, and utilities, which lost at least -0.83%. In Shanghai, the SHCOMP closed at 2,296.08, up from 2,266.38 the prior day. The SHCOMP traded briefly lower to an early intraday low of 2,260, but rallied quickly to a mid-morning intraday high of 2,305.33 before trending back to 2,275 in early afternoon. The index subsequently rallied into the close. The index closed +3.76% above and -0.65% below its respective 20- and 50-day moving averages. All market segments closed at least +0.18% higher. Leaders were basic materials, financials, and consumer goods, which closed at least +1.51% higher. Laggards were utilities, oil and gas, and telecommunications.
In Europe, equity indexes are moderately higher, after strong Portuguese and French sovereign debt auctions. The Euro Stoxx 50, FTSE 100, and DAX are up +0.57%, +0.18%, and +0.13%, respectively. Compared to the prior day’s 2,390.64 close, the Euro Stoxx 50 trades at 2,403.30, compared to a 2,409.00 intraday high. The index is +3.38% and +5.43% above its respective 20- and 50-day moving averages. Most market segments are lower. Leaders are financials, industrials, and oil and gas, which are up at least +0.03%higher. Laggards are health care, technology, and utilities, which are down -0.87%.
Libor, LOIS, Currencies, Treasuries, Commodities:
- Recent interbank lending rates suggest that the substantial stress, evident in the latter half of 2011 and centered on the health and liquidity of Eurozone banks, has peaked and begun to ease. USD LIBOR is at 0.14540%, down from 0.14640% the prior day and the December 30th 0.15400% high. USD 3-month LIBOR is 0.56120%, unchanged from 0.56120% the prior day and recent January 4th peak of 0.58250%.
- The US Libor-OIS (LOIS) spread rose to 47.49 bps from +46.87 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS eased to 84.1 bps, from 84.4 bps Wednesday and December 27th high of 28.80 bps. A rise in the LOIS indicates an increased intra-bank lending risk premium.
- The Euro 3-month basis swap continues to improve, rising to -77.250 bps, the best level since August 18th, from -77.375 bps the prior day, and up from a trough of -147.00 bps on December 14th.
- The U.S. government overnight repo rate is 18.0 bps, unchanged from 18.0 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 0.222% and 1.895%, respectively, compared to 0.226% and 1.898% Wednesday. The yield curve narrowed to +1.670%, 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 weaker against the euro, British pound, and Japanese yen. The dollar trades at US$80.310, off the intraday high of US$80.587, and compares to US$80.609 at the prior day’s close, and above its US$79.622 50-day, US$78.362 100-day, and US$76.475 200-day averages. The euro trades at US$1.2899, compared to an intraday high of US$1.2913, and compares to a close of US$1.2863 Wednesday and US$1.2736 the day prior. The euro trades worse than its US$1.3140 50-day and US$1.3434 100-day averages. In Japan, the dollar trades at ¥76.76, compared to ¥76.82 Wednesday and ¥76.83 the prior day. The yen trades better than its 50-day moving average ¥77.40.
- Commodities prices are mostly higher, with higher energy, higher precious metals, mixed aluminum and copper, and mostly higher agriculture prices.
- The VIX ended at 20.89, down -5.90% from 22.20 at the prior close. The VIX is -4.51% below its 21.88 20-day moving average.
- The Euro Stoxx 50 volatility index (V2X) is down -1.51% to 27.34, compared to 27.76 the prior day. The V2X index trades -8.14% below its 29.76 20-day moving average, -31.0% below the 39.63 30-day high, and +2.47% above the 26.68 30-day low.
- The Hang Seng volatility index (VHSI) fell to 22.34, up +1.92% from 21.92 the prior day. The VHSI index trades -6.03% below its 23.77 20-day moving average.
- CBOE skew rose +4.10% to 130.78 from 125.63 at the prior day’s close and well above a neutral (115-120) range. The index tracks tail risks, the cost of buying out-of-the-money, long-dated options, i.e., options not affected by expirations. The rise suggests that investors are buying more puts than calls, a bearish signal.
U.S. news and economic reporting:
- Initial and continuing jobless claims were 352K and 3432 K, respectively, compared to survey of 384K and 399K revised prior, and 3590K survey and 3628K revised prior, respectively.
Overseas news: Today, Spain sold €6.6 billion in 5-, 7-, and 10-year debt, more than the €4.5 billion maximum targeted and under heavier demand than prior auctions. Today, France sold €7.97 billion in two year notes under average demand and just shy of the €8 billion target. Today, Brazil’s central bank cut interest rates -50 basis points to 10.5%, as expected.
Company news/ratings changes:
· BAC – reports GAAP and operating EPS of $0.15 and $0.11, compared to estimates of $0.13
· MS – reports GAAP and operating EPS of -$0.15 and $0.15, compared to estimates of -$0.57
· HBAN – reports GAAP and operating EPS of $0.14, compared to estimates of $0.14
· BLK – reports GAAP and operating EPS of $3.06 and $3.05, compared to estimates of $2.99
· BBT – reports GAAP EPS of $0.55, compared to estimates of $0.53
4Q2011 Earnings. The fourth quarter’s earnings reports have so far disappointed expectations. Of the 24 S&P500 companies that reported earnings to date, 58% (14 out of 24) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies missed EPS expectations by an average of -0.6% (versus a historical average of +2%). EPS is down -9.7% over the prior year. Though challenged in the current operating environment, 52% of companies reported increased revenues over the prior year and 68% beat revenue estimates. In the fourth quarter of 2011, analysts estimate the SPX will earn $24.34 per share, compared to $25.19 and $22.25 per share in 3Q11 and 4Q10, a -3.4% and +9.4% change, respectively.
With 11 out of 24 BKX members reporting fourth quarter earnings, 55% beat operating EPS estimates, with aggregated results disappointing by -2.1%, while 50% beat revenue estimates, with aggregated results missing by -1.8%. EPS is down by -1.5% over the prior year while revenue has decline by -7.3%. In the fourth quarter, analysts estimate the BKX will earn $0.96 per share, compared to $1.24 and $0.91 per share in 3Q11 and 4Q10, a -22.6% and +5.5% change, respectively.
Valuation. The SPX trades at 12.5x estimated 2012 earnings ($104.64) and 11.1x estimated 2013 earnings ($117.51), compared to 12.3x and 11.0 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 -3.7%, and -0.2%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +10.2% and +23.7%, respectively.
Large-cap banks trade at a median 1.31x tangible book value, and 10.9x and 9.1x 2012and 2013 consensus earnings, respectively, compared to 1.35x tangible book value and 10.8x/9.2x 2012/2013 earnings yesterday. These compare to the 10-year average median multiples of 3.08x tangible book value and 15.9x earnings. In 2012, analysts expect the BKX to earn $4.42 per share, compared to $4.30 and $2.96 in 2011 and 2010, a +2.7% and +49.2% increase, respectively.
Options. Options markets are mixed. 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 0.84, compared to 0.83 the prior day and above its 5- and 10-period moving averages of 0.80 and 0.84, respectively. The index put/call ratio closed at 1.14, compared to 1.21 the prior day, and below the 5- and 10-period moving averages of 1.14 and 1.19, respectively. The equity put/call ratio closed the day at 0.55, compared to 0.59 the prior day and below its 5- and 10-period moving averages of 0.58 and 0.61, respectively.
Price Exhaustion/Trend Reversal. On a daily timeframe, technical price exhaustion metrics show the SPX reached a potential upward price exhaustion level yesterday and on January 11th, the first such signals since April. Intra-day timeframes of 120- and 60-minute intervals show the SPX reached levels of price exhaustion on January 10th and 13th, while the BKX recorded similar indications on the 11th and 12th.
NYSE Indicators. Volume fell -1.58% to 797.74 million shares, 0.94x the 50-day moving average, from 810.58 million shares Tuesday. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +1,773 (compared to +682 the prior day), or 3.81:1. Up volume led down volume by 6.07:1.
In January, we expect dividend accruals of $77.6 thousand.
SPX. On higher volume, the SPX rose +14.37 points, or +1.11%, to 1308.04, the first close above 1300 since July 28th. Volume rose +5.21% to 676.81 million shares, up from 643.31 million shares Tuesday and above the 653.44 million share 50-day moving average. For the 18th consecutive day, the SPX closed above its 50-day moving average (1,246.24) and remained above its 200-day moving average (1,257.60) for the 15th time in the past 16 sessions. For the 109th 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 (1133.64) for the 70th straight session.
From its prior close at 1293.67, the SPX opened lower to 1292 and set the intra-day low of 1290.99 at 9:34. The index gained strength all day, crossing 1300 at 10:20, breached 1305 by 2:30, and closed at the day’s high.
The SPX closed above all major moving averages, above 1200 for the 32nd straight session and above 1300 for the first time in 117 sessions. 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 19th straight session, the SPX closed (by +2.95%) above its 20-day moving average (1270.51). The index closed (by +4.96%)above its 50-day moving average for the 19th straight session. The index closed (by +7.21%) above its 100-day moving average (1220.10) for the 33rd straight session. The SPX closed +4.01% above its 200-day moving average for the 14th time in the past 16 sessions. The 20-, 50-, and 100-day moving averages rose. The directional momentum indicator was positive for the 18th straight session, and the trend is moderate. Relative strength rose to 66.99 from 62.84, the higher end of a neutral range. Next resistance is at 1313.77; next support is at 1296.65.
BKX. On lower volume, the KBW bank index rose +0.48 points, or +1.12%, to end at 43.31, its 11th straight close above 40 and closing above the 2010 low of 42.98 for the fourth time in the last five sessions. Volume fell -11.64% to 83.35 million shares, down from 94.34 million shares Tuesday but above the 80.47 million share 50-day average. The BKX closed +0.77% above its August 30, 2010, closing low of 42.98, the trough of the 2010’s correction, but -25.26% and -22.15% 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 regional banks. From its prior close of 42.83, the BKX opened lower to 42.65 and fell to the intra-day low of 42.32 at 9:40. Reversing momentum, the BKX retook its break-even line at 10:00, traded flat through noon, and rallied through the afternoon. The index set the intra-day high at the close.
Technical indicators are mixed, but improving. On a percentage basis, bank stocks have outperformed the broader market’s rebound from the October lows, rising +33.02% from the 32.56 October 4th intra-day low compared to a +21.79% rebound in the SPX. However, the BKX is still -22.2% below its 2011 high, compared to the SPX which has corrected only -4.1%. Moving averages alignment is mixed, as the 20- and 50-day moving averages (40.85 and 39.13, respectively) moved above the 100-day moving average (38.44), and each average is rising. The 100-day moving average appears to have troughed, though the 200-day moving average (42.83) 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 14th time in the past 15 sessions, the 20-day closed (by +1.72 points) above the 50-day, and the gap is expanding. The 50-day moving average closed (by -3.70 points) below the 200-day moving average for the 152nd straight session, but the gap continues to narrow. The 100-day moving average closed (by -4.39 points) below the 200-day moving average for the 130th straight session, but the gap is narrowing. The BKX closed (by +6.03%) above its 20-day moving average for the 21st time in the last 22 sessions. The index closed (by +10.70%) above its 50-day moving average for the 17th straight session. The index closed (by +12.68%) above the 100-day moving average for the 18th straight session. The index closed (by +1.13%) below its 200-day moving average for the fourth time in five sessions. The index closed below 50.0 for the 159th straight session but above 40.0 for the 11th straight session. The directional movement indicator was positive for the 16th consecutive session, and the trend is moderate. Relative strength rose to 66.43 from 64.36, a neutral range. Next resistance is 43.64; next support at 42.65.
We made were a net seller on the day, increasing cash by +$3,815.11.
- At $59.38 and $59.57, we traded 20,000 shares of PNC, realizing a gain of $3,815.11. The stock closed at $59.64.
Profit and position:
- Before fees, our net realized and mark-to-market cumulative gain is $5.894 million, compared to $5.715 million the prior day.
- On net invested capital of $33.517 million, our NAV is up +4.53%, versus a -7.07% and -49.2% change in the SPX and BKX, respectively, since May 5, 2008.
- On the day, HTC gained +$176.2 thousand, or +0.51% after leverage adjustment. We underperformed the SPX, XLF, BKX, and KRX.
- Our common equity positions rose +1.79%. Our warrant positions lost -3.42%. Our long ETFs fell -0.20%. Our preferreds fell -0.12%. Our short positions fell -1.11%. Our short ETF rose +2.34%.
- In January, we have a market gain of +$2.156 million, or +6.65%. We are outperforming the SPX (+4.01%), but are underperforming the XLF (+7.08%), and KRX (+9.95%), and BKX (+7.10%).
- In 2012, we have a market gain of +$2.156 million, or +6.65%. We are outperforming the SPX (+4.01%), but are underperforming the XLF (+7.08%), and KRX (+9.95%), and BKX (+7.10%).
- Our gross long position is 103.6% of NAV, compared to 103.2% of NAV the prior day.
- Our net short position is -8.53% of NAV, compare to -8.43% of NAV the prior day.
- Our net leverage position is 96.2% of NAV, compared to 95.2% of NAV the prior day.
NAV, cash, and accrued incentive positions:
- Our NAV ended at $35.035 million, compared to $34.970 million the prior day and $32.579 million at the end of December.
- Our cash position is +$3.502 million, +9.99% of NAV, compared to $3.613 million +10.3% of NAV the prior day.