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U.S. Futures Strengthen On Dovish FOMC, Strong December U.S. Durables

|Includes: Apple Inc. (AAPL), FHN, STI
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. All major indexes are above their respective 20-, 50-, 100-, and 200-day moving averages. Notably, their respective 200-day moving averages are at upward inflection points. For example, the Nasdaq's 200-day moving average rose 18 bps yesterday, its first upward move since August. The SPX's 200-day moving average fell only 1 bps yesterday, and appears poised to reverse a decline that commenced in early August.

In Japan, equity markets closed modestly lower overnight. Chinese markets are closed this week for the New Year. European exchanges are moderately higher and near their intraday highs. The dollar is weaker. U.S. equity options markets suggest a neutral short-term outlook. Commodities prices are higher. U.S. Treasury yields are lower at the long end of the curve, with the 10-year at 1.952%, down from 1.995% the prior day. U.S. repo rates are at 10 bps.

The ECB's bank lending facilities has eased interbank lending and associated liquidity 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 early August and less than half its worse level of late December.

U.S. equity futures are moderately higher and strengthening. After a fair value adjustment of +1.71 points, March SPX equity futures are at 1326.20, up +4.29 points. The SPX opens at 1326.06, -2.75% below its April 29, 2011, multi-year 1363.61 closing high, but +2.85% and +5.85% above its respective 20- and 50-day moving averages and +8.14% and +5.48% above its respective 100- and 200-day moving averages. Next resistance is at 1333.69. Next support is at 1313.04.

Wednesday. Equity markets reversed early moderate losses and ended with strong gains. Markets appeared to expect, or perhaps rather to hope, that the Federal Reserve's Open Market Committee would adopt a more hawkish (less dovish) tone. But at noon, when the FOMC issued an even more dovish message than at the close of last year, investors responded by buying equities, taking the major indexes to new 2012 highs and nearly back to their best levels of 2011. On the strength of AAPL's strong first quarter, the Nasdaq closed up +1.14%, followed by the NYSE composite, SPX, and DJI, which closed up +0.95%, +0.87%, and +0.64%, respectively.

From the 1314.65 prior close, the SPX opened at 1312 and quickly traded to an intraday low of 1307.65. The index rallied through most of the morning, but buying accelerated with the FOMC report and strengthened again after the Bernanke press conference, with the SPX reaching an intraday high of 1328.30 in the final half hour. All market segments closed higher. Leaders were basic materials, utilities, and consumer goods, which gained at least +1.21%. Laggards were consumer services, telecommunications, and financials, which closed up at least +0.26%. As on Tuesday, financials initially traded off about -1%, with greater weakness in the money center and investment banks, but rallied quickly back to breakeven, then plateaued and traded within narrow ranges through most of the day. For a 6th consecutive day, all indexes closed above their respective 20-, 50-, 100-, and 200-day moving averages. Market breadth was positive. NYSE volume rose +11.8%, to 0.99x the 50-day moving average. Volatility initial rose, but by the close was down -3.17% at 18.31, well off the 19.55 intraday high, set just after the open. The CBOE put/call skew remains elevated, but also moved down.

Technically, the session was favorable, based on the intraday positive reversal and the positive inflection of the Nasdaq 200-day moving average. Trading desks reported a generally quiet morning, when buyers again bought the dip, but a more active afternoon, described by one desk as a "painful" rally in which buyers' motivation is driven by a need to participate in the current stock advance, i.e., "performance anxiety" driven. Markets continue to debate how "exhausted" the current rally may be. Rotation into higher beta names was not so pronounced as in recent days. First support is seen at 1313, then at 1293, 1276, 1267, and 1258, the 200-day moving average. Resistance is 1334 and 1345.

European concerns appear near-term assuaged by the 3-year long-term refinancing operation (LTRO), which has allowed Eurozone banks to prefund redemptions due in 2012 that might otherwise have been difficult to fund. The last scheduled LTRO is February 29th. Other central banks (Brazil, PBOC) are also easing.


Distribution days number 3 on the Nasdaq, SPX, and BKX, and 2 on the DJI and NYSE composite, unchanged.

In Asia, equity markets closed modestly lower in Japan. In Japan, the NKY closed down -0.39% on a -7.77% decrease in volume. Commentary attributed the losses to profit taking after the recent strong run-up. In China, markets are closed this week for the New Year.

In Japan, the NKY closed at 8,849.47, compared to 8,883.69 the prior day. The index closed +3.73% and +4.18% above its respective 20- and 50-day moving averages. The index opened at 8,890, but quickly found resistance at the 8,894.60 intraday high, and faded by mid-day to 8,840, where it subsequently traded within a narrow range into the close. before fading in the final half-hour. Market segments closed mixed. Leaders were telecommunications, utilities, and oil and gas, which rose at least +0.26%. Financials shed -0.14%. Laggards were technology, consumer goods, and industrials, which ended at least -0.55% lower.

In China, markets are closed through Friday for the Lunar New Year.

In Europe, equity indexes are higher on the strength of a rebounding euro and views that Greek sovereign debt issues are manageable. Consumer confidence rose in Germany and France, but was unchanged in Italy. The Euro Stoxx 50, FTSE 100, and DAX are up +1.11%, +1.05%, and +1.32%, respectively. Compared to the prior day's 2,421.12 close, the Euro Stoxx 50 trades at 2,447.86, compared to a 2,456.31 intraday high and 2,427.95 intraday low. The index is +3.35% and +6.48% above its respective 20- and 50-day moving averages. Most market segments are higher. Leaders are technology, utilities, and financials, which are up at least +1.50%. Laggards are health care and industrials, (up at least +0.38%), and oil and gas, down -0.04%.

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 is easing. USD LIBOR is at 0.14100%, down from 0.14150% the prior day and down from the December 30th 0.15400% high. USD 3-month LIBOR is 0.55310%, down from 0.55660% the prior day and January 4th peak of 0.58250%.
  • The US Libor-OIS (LOIS) spread fell to 45.68 bps, down from 46.56 bps the prior day, and compares to the recent January 6th high of 50.05 bps. Euribor-OIS eased to 78.25 bps, from 79.55 bps Wednesday and December 27th high of 98.80 bps. A fall in the LOIS indicates a decreased intra-bank lending risk premium.
  • The Euro 3-month basis swap continues to improve, rising to -69.875 bps, the best level since August 5th, from -74.0000 bps the prior day, and up from a trough of -147.00 bps on December 14th.
  • The U.S. government overnight repo rate is 10.0 bps, up from 9.0 bps the prior day, but well off from the August 2nd high of 33 bps.
  • U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.211% and 1.956%, respectively, compared to 0.223% and 1.995% Wednesday. The yield curve narrowed to +1.742%, compared to +1.772% 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, but off the day's lows. The dollar trades at US$79.253, just off the US$79.113 intraday low, and compares to US$79.579 at the prior day's close, and above its US$79.820 50-day, US$78.572 100-day, and US$76.598 200-day averages. The euro trades at US$1.3144, compared to an intraday high of US$1.3175, and compares to a close of US$1.3089 Wednesday and US$1.3036 the day prior. The euro trades better than its US$1.3089 50-day and US$1.3384 100-day averages. In Japan, the dollar trades at ¥77.64, compared to ¥77.78 Wednesday and ¥77.67 the prior day. The yen trades slightly worse than its 50-day moving average ¥77.45.
  • Commodities prices are higher, with higher energy, precious metals, aluminum and copper, and agriculture prices.

Volatility, Skew:
  • The VIX ended at 18.31, down -3.17% from 18.91 at the prior close. The VIX is -12.8% below its 21.01 20-day moving average.
  • The Euro Stoxx 50 volatility index (V2X) is down -2.06% to 24.72, compared to 25.24 the prior day. The V2X index trades -13.8% below its 28.62 20-day moving average, -25.9% below the 33.37 30-day high, and +1.50% above the 24.35 30-day low.
  • The Hang Seng volatility index (VHSI) closed Friday at 21.81, down -2.37% from 22.34 the prior day. The VHSI index trades -7.23% below its 23.51 20-day moving average.
  • CBOE skew rose -1.70% to 125.22 from 127.38 at the prior day's close, but well above a neutral (115-120) range. The index tracks market 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. A spike to 130, as on January 18th close, correlates well with short-term market peaks.

U.S. news and economic reporting:
  • December Chicago Fed national activity index reported 0.17, compared to survey -0.12 and revised prior -0.46.
  • December durable goods orders were 3.0%, compared to survey +2.0% and revised prior +4.3%. Ex-transportation, durables rose +2.1%, compared to survey +0.9% and revised prior +0.5%.
  • The latest week's initial and continuing jobless claims were 377K and 3554K, respectively, compared to survey 370K and 3500K and revised prior 356K and 3466K, respectively.

Overseas news: Italy sold €4.5 billion off 2-year debt with yields declining by -90 basis points from the December 28th auction while demand fell as well. German and French consumer sentiment rose more than expectations, while Italy consumer sentiment remained flat. Today, Japan announced a $13 billion bailout of TEPCO, the energy company which owns the melted nuclear plant in Fukushima.

Company news/ratings changes:

· STI - downgraded to hold at Deutsche Bank

· FHN - downgraded to hold at Deutsche Bank

4Q2011 Earnings. The fourth quarter's earnings reports have so far exceeded expectations. Of the 132 S&P500 companies that reported earnings to date, 67% (89 out of 132) beat operating EPS estimates, versus the historical average of 62%. In aggregate, companies beat EPS expectations by an average of +3.7% (versus a historical average of +2%). EPS is up +4.0% over the prior year. Though challenged in the current operating environment, 72% of companies reported increased revenues over the prior year and 57% 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 23 out of 24 BKX members reporting fourth quarter earnings, 43% beat operating EPS estimates, with aggregated results disappointing by -12.1%, while 43% beat revenue estimates, with aggregated results missing by -0.9%. EPS is down by -19.5% over the prior year while revenue has decline by -3.9%. 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 12.6x estimated 2012 earnings ($104.83) and 11.3x estimated 2013 earnings ($117.51), compared to 12.6x and 11.2 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 -3.6%, and -0.2%, respectively. Analysts expect 2012 and 2013 earnings to exceed 2011 earnings ($94.97) by +10.4% and +23.7%, respectively.

Large-cap banks trade at a median 1.33x tangible book value, and 10.5x and 9.3x 2012and 2013 consensus earnings, respectively, compared to 1.31x tangible book value and 10.6x/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 $4.37 per share, compared to $4.30 and $2.96 in 2011 and 2010, a +1.6% and +47.6% increase, 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 0.77, compared to 1.04 the prior day and below its 5- and 10-period moving averages of 0.86 and 0.83, respectively. The index put/call ratio closed at 1.06, compared to 1.85 the prior day, and below the 5- and 10-period moving averages of 1.41 and 1.28, respectively. The equity put/call ratio closed the day at 0.57, compared to 0.84 the prior day, below its 5- and 10-period moving averages of 0.61 and 0.60, respectively.

Price Exhaustion/Trend Reversal. On a daily timeframe, technical price exhaustion metrics show the SPX reached a potential upward price exhaustion level on January 18th and 11th, the first such signals since April, while the S&P futures reached full upward price exhaustion on January 23rd. 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 rose +11.8% to 830.46 million shares, 0.99x the 50-day moving average, from 742.71 million shares Tuesday. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +1,561 (compared to +236 the prior day), or 3.16:1. Up volume led down volume by 3.65:1.

In January, we expect dividend accruals of $77.6 thousand.

SPX. On higher volume, the SPX rose +11.41 points, or +0.87%, to 1326.06, the sixth straight close above 1300 and the highest close since July 27th, 2011. Volume rose +17.20% to 690.03 million shares after accelerating following the Federal Reserve's 12:30pm policy announcement, up from 588.77 million shares Tuesday and above the 652.42 million share 50-day moving average. For the 23rd consecutive day, the SPX closed above its 50-day moving average (1,252.79) and remained above its 200-day moving average (1,257.22) for the 20th time in the past 21 sessions. For the 114th 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 (1133.55) for the 75th straight session.

From its prior close at 1314.65, the SPX opened lower to 1314 and fell to the intra-day low of 1307.65 at 10:00. The index rallied back towards the break-even line through 11:30, and fluctuated there until the Federal Reserve's 12:30pm policy announcement. The market took the statement well, and from 12:30 through 2:00, the index rallied to the 1224 level. Gains retraced back to 1220 by 2:30, but the index rallied again into the close, setting the intra-day high of 1328.30 at 3:50 and finishing at the top end of the day's range.

The SPX closed above all major moving averages, above 1200 for the 37th straight session and above 1300 for the sixth 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. The 200-day moving average appears to have bottomed. For the 24th straight session, the SPX closed (by +2.85%) above its 20-day moving average (1289.35). The index closed (by +5.85%)above its 50-day moving average for the 24th straight session. The index closed (by +8.14%) above its 100-day moving average (1226.19) for the 38th straight session. The SPX closed +5.48% above its 200-day moving average for the 19th time in the past 21 sessions. The 20-, 50-, and 100-day moving averages rose and the 200-day moving average declined by only one basis point. The directional momentum indicator was positive for the 24th straight session, and the trend is moderate. Relative strength rose to 71.57 from 68.19, an overbought range and the highest reading since February 18th, 2011. Next resistance is at 1333.69; next support is at 1313.04.

BKX. On higher volume, the KBW bank index rose +0.06 points, or +0.14%, to end at 43.53, its 16th straight close above 40 and closing above the 2010 low of 42.98 for the ninth time in the last 10 sessions. Volume rose +6.00% to 73.05 million shares, up from 68.92 million shares Tuesday but below the 80.89 million share 50-day average. The BKX closed +1.28% above its August 30, 2010, closing low of 42.98, the trough of the 2010's correction, but -24.88% and -21.75% 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 worst performing sector, and regional banks outperformed large-cap banks. From its prior close of 43.47, the BKX opened lower to 43.15 and set the intra-day low of 43.08 at 9:32. Through 10:30, the index rallied strongly, crossing into positive territory and reaching 43.64. The index fluctuated at break-even through 2:00, when a sell-off took the BKX back tto 43.25. Another strong rally followed, and the index set the intra-day high of 43.67 at 3:50. A small retracement at the bell left the index with a modest gain but closing at the higher end of the day's range.

Technical indicators are mixed, but improving. On a percentage basis, bank stocks have outperformed the broader market's rebound from the October lows, rising +33.69% from the 32.56 October 4th intra-day low compared to a +23.47% rebound in the SPX. However, the BKX is still -21.8% below its 2011 high, compared to the SPX which has corrected only -2.7%. Moving averages alignment is mixed, as the 20- and 50-day moving averages (42.06 and 39.52, respectively) moved above the 100-day moving average (38.66), and each average is rising. The 100-day moving average appears to have troughed, though the 200-day moving average (42.60) 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 19th time in the past 20 sessions, the 20-day closed (by +2.53 points) above the 50-day, and the gap is expanding. The 50-day moving average closed (by -3.08 points) below the 200-day moving average for the 157th straight session, but the gap continues to narrow. The 100-day moving average closed (by -3.94 points) below the 200-day moving average for the 135th straight session, but the gap is narrowing. The BKX closed (by +3.50%) above its 20-day moving average for the 26th time in the last 27 sessions. The index closed (by +10.14%) above its 50-day moving average for the 22nd straight session. The index closed (by +12.60%) above the 100-day moving average for the 23rd straight session. The index closed (by +2.19%) above its 200-day moving average for the ninth time in 10 sessions. The index closed below 50.0 for the 164th straight session but above 40.0 for the 16th straight session. The directional movement indicator was positive for the 21st consecutive session, and the trend is strong. Relative strength fell to 66.32 from 68.19, a neutral range. Next resistance is 44.12; next support at 42.84.