Wednesday, September 19, 2012

U.S. Futures Signal Gains; Portuguese Debt Success Sends Euro Equities Higher

This morning. Equity futures were higher, with March SPX futures at 1279.80, up +9.32 points after fair value adjustment. Asian, and especially European markets, are higher. Asian markets are recovering from their recent sharp correction, and European economic news surprised positively. In the U.S., earnings season progresses with 3 of 4 S&P500 companies reporting positive earnings surprises. Friday, JPMorgan (JPM) initiates the banks’ earnings season. Yesterday, U.S. equities moved higher on mixed volumes. Market breadth was positive. Markets are in a confirmed uptrend. Distribution days (index losses of more than -0.25%, on increased volume in the past 25 trading days) number 4 for the NASDAQ, 3 on NYSE composite, 1 for the SPX, and none for the DJI. March SPX futures are at 12777.80, up +5.85 points after fair value adjustment. Next SPX resistance is at 1273.45. Next support is at 1264.11.

Asian equity markets closed higher, with Chinese equities higher on slightly lower volume on strength in insurance and commodity producing stocks. The Nikkei, Hang Seng, and Shanghai closed up +0.02%, +1.54%, and +0.62%, respectively. Volume was -0.39% lower on the SHCOMP, where financials were the best performer, up +1.05% on news reports that Chinese insurers had boosted premiums. The SHCOMP is in a confirmed uptrend after a sharp -13.5% decline starting November 9th and ending December 28th. European equity markets are also higher on positive German economic news and a better than expected Portuguese debt sale. The Eurostoxx50, FTSE, and DAX are up +1.91%, +0.42%, and +1.33%, respectively. On the EuroStoxx, financials are the standout performers, up a remarkable +4.00%.

LIBOR trends remain unremarkable. Overnight USD LIBOR is 0.24000%, unchanged from Tuesday, and down from 0.25188% at year-end. USD 3-month LIBOR is 0.30313%, unchanged since January 6th and compared to 0.30281% at year-end. In early trading, the dollar is slightly stronger against the yen and pound, but unchanged against the euro. The euro trades at US$1.2975, compared to US$1.2974 Tuesday and US$1.2951 the prior day. Technically, the euro has broken down, below its 200-day moving average US$1.3071, but this has happened before, as recently as late November. The dollar trades at ¥83.39, compared to ¥83.24 Tuesday and ¥82.71 the prior day. The yen is much better than its ¥86.43 200-day moving average. Treasury yields are higher, with 2- and 10-year maturities yielding 0.609% and 3.381%, respectively, compared to 0.585% and 3.340% Tuesday. The yield curve spread widened to +2.772% compared to +2.755% the prior day. In the past year, the 2- and 10-year spread has varied from a low of +1.959% on August 26, 2010, and a high of +2.90% on January 11, 2010. Commodities are generally higher, with higher petroleum and natural gas, lower precious metals, but higher aluminum and copper, and higher agricultural prices.

U.S. news. ABC consumer confidence improved to -40 from -45. The IBD/TIPP economic optimism survey rose to 51.9, much better than prior 45.8 and survey 47.0. MBA mortgage applications rose +2.2%, compared to +2.3% the prior week. Import prices rose +1.1% MoM and +4.8% YoY.

Overseas news. Portugal’s €600 million 10-year bond auction also saw higher demand while yields dropped by -9 basis points. In 2010, German GDP increased +3.6% over the prior year, the fastest growth rate since reunification in 1992. France dismissed reports that European leaders will increase the size of the €440 billion EU bailout fund. An advisor to the People’s Central Bank of China signaled a potential rate increase during the first quarter.

Company news/research:

· ZION – cut to sell at Sterne Agee

· GS – downgraded to neutral on valuation at JPMorgan

· PNC, USB – most likely 2011 acquirers, according to Goldman Sachs

· CMA, ZION, FHN, SNV, MTB – will benefit the most of regional banks from rising rates, according to Citi

· SNV, STT – listed as top 2011 picks at Citi

· BAC, PNC, CMA, JPM, GS – top 2011 picks at Wells Fargo

· GS – a Senate report due out soon reportedly critical of GS’s conflicts of interest

· JPM – CEO Dimon expects to increase the dividend to a $0.75 - $1.00 annual range by the second quarter.

Tuesday’s equity markets. Markets advanced, but the recent listlessness continued as all indexes rise to, but prove unable to break through, resistance levels. Markets gapped to initial resistance levels, but weakened in early afternoon, retreating nearly to breakeven before rallying into the close. The NYSE composite led other indexes, up +0.66%, but closed below its January 5th high. The SPX and DJI rose +0.37% and +0.30%, respectively, but also close below recent highs. The NASDAQ, the best performing index this year, advanced +0.33%, up +2.41% in 2011. Volume was mixed, higher on the DJI, but lower on the other indexes. Oil and gas, basic materials, and health care were the best performing market segments, up +0.53%. Consumer services, consumer goods, and telecommunications were the worst performers.

Trading desks reported a continuation of recent themes, 1) bids on weakness, 2) unexceptional conviction whether long or short, 3) shrugging off of negative news, and 4) generally positive news flow (e.g., recent merger and acquisition activity). Market volatility continues to drift lower.

Technical indicators are generally positive. Markets are in a confirmed uptrend that began in early September, which after consolidating in November, extended robustly through one of the strongest Decembers on record. All major indexes closed above their respective 200-week and 20-, 50-, 100-, and 200-day averages. Markets are in a bullish configuration, with 50-day moving averages above respective 200-day moving averages. New 52-week highs minus new lows fell to its lowest level this year, at +110 from +125 the prior day. The HILO trend is positive, as the 10-day moving average rose to 166.70, above respective 20- and 50-day moving averages (157.35 and 157.50). Directional movement indicators are positive, and the trend is strengthening. Relative strength indicators are at the top of their respective neutral ranges or overbought, as for the SPX and NASDAQ. Prospective resistance levels are 1278 on the SPX, followed by 1285, and 1300; technical support is at 1270, followed by 1260, and 1250.

Market volatility fell to the lowest levels since April 15th, the day prior to the SEC suit against Goldman Sachs. The VIX declined -3.71% to end at 16.89, compared to 17.54 the prior day. Market sentiment is positive, probably excessively so, though off recent highs. The latest week’s (January 6th) AAII Investor Bullish Sentiment index rose to 55.88, up +8.27% from 51.61 on December 30th, but below the 63.30 reading of December 23rd. Sentiment indicators are highly variable and are often best read as contrarian in their aspect. Despite positive sentiment, there are many market skeptics, too, and they have hardly capitulated, based on endless business network interviews and research that passes this desk.

Financial stocks closed higher, as the XLF, BKX, and KRX rose +0.40%, +0.65% and +0.45%, respectively. While the broader indices are near two-year highs and have recovered their post-September 2008 losses, bank stocks have not, with the BKX closing -8.46% below its April highs and -35.7% below its best level of 82.55 in September 2008.

NYSE Indicators. Volume fell -1.78% to 938.37 million shares, from 955.35 million shares Monday, and compares to a 989.1 million share 50-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +557 (compared to +76 Monday), or 1.45:1. Up volume led down volume by 1.82:1.

4Q2010 Earnings. The quarter’s first earnings results have so far exceeded EPS expectations and matched revenue estimates. Of the 4 S&P500 companies that reported earnings to date, 75% (3 of 4) beat operating EPS estimates, versus the historical average of 62%. Companies beat by an average of +17.4% (versus a historical average of +2%). EPS is up +45.8% over the prior year. Though challenged in the current operating environment, 2 companies (50%) reported increased revenues and 2 companies (50%) beat revenue estimates.

Valuation. The SPX trades at 13.4x estimated 2011 earnings ($95.03) and 11.9x estimated 2012 earnings ($107.44), compared to 13.4x and 11.8x respective 2011-12 earnings yesterday. The 10-year average median Price/Earnings multiple is 20.0x. Since the beginning of 2010, sell-side analysts increased 2011 and 2012 earnings estimates by +2.7, and +3.2%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +18.6% and +34.0%, respectively.

Large-cap banks trade at a median 1.57x tangible book value and 14.5x 2011 earnings, compared to 1.58x tangible book value and 14.4x 2011 earnings yesterday. These compare to the 10-year average median multiples of 3.08x tangible book value and 15.9x earnings. Analysts expect 2011 large-cap bank earnings to exceed 2010 earnings by +34.3%. Analysts’ estimates for bank 4Q2010 earnings are 19.1% higher than were estimates for 3Q2010 earnings. In 3Q2010, large-cap banks earned $13.78 (the sum of 31 banks’ operating EPS), compared to $5.32 in 3Q2009. In 3Q2010, the BKX earned $0.71 per share, compared to -$1.24 per share a year earlier.

Quarterly Bank Balance Sheet Analysis. According to the Federal Reserve’s latest weekly H.8 report (data through 12/29/10), the 25 largest domestic banks collectively reported a +1.0% increase in period-end loans over the third quarter, a -6.3% drop in reserves (to 3.81% of total loans, or a -$10.2 billion drop from the prior quarter), and a +3.4% increase in deposits.

Regarding loans, C&I loans increased approximately +2.2% over the third quarter levels, residential real estate climbed +2.0%, and credit card loans increased +1.2%, while home equity loans declined -3.9% and commercial real estate loans declined -3.2%.

SPX. On lower volume, the SPX rose +4.73 points, or +0.65% to 1274.48. Volume fell -3.11% to 711.83 million shares from 734.66 million shares Monday, below the 776.73 million share 50-day moving average. For the 58th consecutive day, its 50-day moving average closed above its 200-day moving average (1227.97 versus 1149.92, respectively). The SPX closed above its 200-week moving average (1184.39).

The SPX gapped 6 points higher at the open to the 1276 level, in sympathy with European gains. An early sell-off pushed the index back to the 1272.50 level at 10am. Buyers bought the dip and turned momentum, rallying the index to its intra-day high of 1277.25 at 11:12. The index traded sideways through 1:00 when a sharp sell-off pushed the index back to 1272 by 1:10. A brief rebound rally faded and the index fell back to the breakeven line just after 2:00. As they have consistently during this uptrend, buyers again stepped in on the move lower and pushed the index to a closing bell rally. The index closed +3.79% above its 50-day moving average, closing above that average for the 90th consecutive day, and +10.83% above its 200-day moving average. The 20-, 50-, 100-, and 200-day moving averages rose.

Technical indicators are positive. The SPX closed above its April highs for the 28th straight session and above 1270 for the fourth time in the previous five sessions. The directional momentum indicator is positive, with a stable trend. Relative strength rose to 70.70 from 68.25, moving into an overbought range. Next resistance is at 1277.95; next support is at 1270.32.

BKX. On lower volume, the KBW bank index closed at 52.71, down -0.17 points or -0.32%. The index closed +22.64% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -9.04% below its April 23rd closing high.

Financials outperformed the market, and large-cap banks outperformed regionals. The index gapped higher at the open, setting the intra-day high of 53.42 at 9:31. Fading from the open until 10:30, the index found support and buyers at 52.90. A smaller rally than in the broader markets took the index to 53.20 at 11:00. Trading sideways through 1:00, financials fell in-kind with the broader market sell-off. The intra-day low of 52.74 hit just after 2:00, and the index managed a modest rally into the close. The index closed above 50 for the 16th straight day. Volume fell -14.88% to 108.10 million shares, down from 127.00 million shares Monday, and below the 157.57 million share 50-day average.

Technical indicators are positive. The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (51.93, 49.00, 47.53, and 49.09, respectively), closing above the 200-day average for the 24th straight session. The 20-, 50-, 100-, and 200-day averages all increased. The 50-day moving average closed (by -0.09 points) below the 200-day moving average, as it has since August 16th, but signals a “golden” cross tomorrow. The directional movement indicator is positive, with a stable trend. Relative strength rose to 64.01 from 62.12, the high end of a neutral range. Next resistance is 53.42; next support at 52.71.

Disclosure: I am long JPM, BAC, GS, PNC, USB, SNV, STT, CMA.

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