Sunday, January 20, 2013

U.K. Reports Economic Contraction; Futures Point Lower

This morning. Equity futures are lower on a contraction in 4Q2010 economic activity in the United Kingdom, prospective monetary tightening in China, and weak performances in recent Chinese IPOs. March SPX futures are at 1282.90, down -4.29 points after fair value adjustment. Next SPX resistance is at 1294.36. Next support is at 1284.90. Though Asian markets were mixed, the Shanghai composite continues to sell off. European markets are mixed.

Yesterday, markets posted strong gains, led by a +1.04% gain on the Nasdaq, ending a three-day losing streak. Markets were strong through the morning, but resistance stymied further moves through the afternoon. The DJI closed at another new multi-year high and is within 20 bps of 12,000. The other major indexes closed below their recent multi-year highs of last Tuesday. Distribution days number 3 on the NASDAQ and NYSE. The DJI and SPX have no distribution days in the past 25 trading days. Markets are in a confirmed uptrend.

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Overnight, the Nikkei, Hang Seng, and Shanghai closed mixed, +1.15%, -0.05%, and -0.68%, respectively. On the SHCOMP, volume fell -20.9%, with financials the only gaining segment. Basic materials, technology, and industrials were the worst performers, ending at least -1.27% lower. Chinese equity markets continue to weaken on concerns that monetary authorities will continue to tighten monetary policy, though there was no reported activity today. After strength in the first trading days of the year, the SHCOMP is -4.65% lower in 2011. European equity markets are generally mixed. The Eurostoxx50, FTSE, and DAX are -0.20%, -0.33%, and -0.41%, respectively. Markets are responding to news that the United Kingdom’s economy shrank -0.5% in 4Q2010, compared to +0.7% growth the prior quarter. On the EuroStoxx, financials are the worst performing market segment, down -1.16%.

LIBOR trends remain unremarkable. Overnight USD LIBOR is 0.23688%, unchanged since last Wednesday and down from 0.25188% at year-end. USD 3-month LIBOR is 0.30438%, up from 0.30313% Monday, and compared to 0.30281% at year-end. In early trading, the dollar is slightly stronger against the euro and pound, but weaker against the yen. The euro trades at US$1.3612, compared to US$1.3638 Monday and US$1.3621 the prior day. For the 4th consecutive day, the euro closed above its 50-, 100-, and 200-day moving averages. The dollar trades at ¥82.45, compared to ¥82.53 Monday and ¥82.57 the prior day.

Treasury yields are lower, with 2- and 10-year maturities yielding 0.617% and 3.383%, respectively, compared to 0.625% and 3.404% Monday. The yield curve spread narrowed to +2.766% compared to +2.779% 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 +2.89% on February 17, 2010. Despite the weaker dollar, commodities are much lower, with lower petroleum and natural gas, precious metals, lower aluminum and higher copper, and lower agricultural prices.

U.S. news. Over the next two days, attention will focus on housing. At 9:00, markets will see the release of the November CaseShiller home price report, followed by consumer confidence and the Richmond Fed manufacturing index at 10:00. Tomorrow, we’ll see the ABC consumer confidence report, followed by MBA mortgage applications, both for the most recent week, followed by new home sales for December. The Fed FOMC meets Wednesday, with its report released at 2:15. Thursday, the most recent week’s initial and continuing claims are released. On Friday, 4Q2010 GDP revisions are released.

Overseas news. In the fourth quarter, U.K. GDP declined -0.5% compared to estimates for +0.5% growth and the 3rd quarter’s +0.7% growth. In December, French consumer spending increased more than estimated. In the fourth quarter, Spanish business confidence declined more than expected and reached the lowest level since the 3rd quarter of 2009. China’s seven day inter-bank lending repurchase rate jumped 285 basis points to 7.65% (a three-year high) as banks bid heavily for government deposits amid a liquidity squeeze.

Company news/research:

  • SBNY – reports 4Q10 GAAP and operating EPS of $0.72 and $0.73 respectively, compared to estimates of $0.64
  • BLK - reports 4Q10 GAAP and operating EPS of $3.35 and $3.42 respectively, compared to estimates of $2.89
  • KEY - reports 4Q10 GAAP EPS of $0.33 compared to estimates of $0.14

4Q2010 Earnings. The quarter’s first earnings results have so far exceeded EPS and revenue expectations. Of the 57 S&P500 companies that reported earnings to date, 74% (42 of the 57) beat operating EPS estimates, versus the historical average of 62%. Companies beat by an average of +7.1% (versus a historical average of +2%). EPS is up +142.8% over the prior year. Though challenged in the current operating environment, 40 companies (70%) reported increased revenues and 43 companies (75%) beat revenue estimates.

With 17 of the 23 BKX members reporting, 76% (13 out of 17) beat operating EPS estimates. Bank revenues have disappointed slightly, missing estimates by -1.0% on average. Eleven banks (64%) reported increased revenues over the prior year’s quarter.

Monday’s equity markets. Stocks rallied through the morning, as technology and basic materials rebounded, and industrials continued their recent leadership. The DJI closed at a new multi-year high. All the major averages advanced at least +0.58%, with Nasdaq performing best with a gain of +1.04%. Volumes were well below prior day’s levels, and in a quiet and slow trade, volatility drifted lower. The VIX ended at 17.65, down -4.44% from 18.47 at the prior close. The rally stalled at noon, with the SPX at 1292; impressively, markets shrugged off some weakness in the last hour to rally again to close near the day’s highs. Technology rebounded from prior consecutive days’ losses, posting the best segment gains. Industrials and basic materials were the other best performing segments. Oil and gas, financials, and health care were the worst performers

Technical indicators are generally positive. Markets are in a confirmed uptrend that began in early September, which after consolidating in November, has extended over the last several weeks. After last week’s mixed results, there are indications that the uptrend is under pressure, especially as markets are unable to push through resistance. Still, the trade in U.S. equity markets seems increasingly driven by fundamentals and less by the technicals, or the macro trade, as was so common in recent months. Fundamentals are improving.

All of the major indices closed above their respective 200-week and 20-, 50-, 100-, and 200-day averages. Markets remain in a bullish configuration, with the 50-day moving average above their respective 200-day moving averages. The relative strength indicator rose to 65.86, near the top of a neutral range, up from 62.26 Friday, and an overbought 75.22 on January 18th. Investor sentiment remains elevated, with the January 20th AAII at 50.70, down from 52.34 the prior week and from a high of 63.30 on December 23rd.

Financial stocks closed lower, with the XLF, BKX, and KRX -0.11%, -0.97%, and -0.57%, 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 -8.44% below its April 2010 highs and -35.7% below its best level of 82.55 in September 2008.

NYSE Indicators. Volume rose +6.36% to 1.266 billion shares, from 1.190 billion shares Thursday, and compares to a 991.4 million share 50-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led decliners by +151 (compared to -722 Thursday), or 1.11:1. Up volume led down volume by 1.34:1.

4Q2010 Earnings. The quarter’s first earnings results have so far exceeded EPS and revenue expectations. Of the 65 S&P500 companies that reported earnings to date, 72% (47 of the 65) beat operating EPS estimates, versus the historical average of 62%. Companies beat by an average of +6.5% (versus a historical average of +2%). EPS is up +124.0% over the prior year. Though challenged in the current operating environment, 47 companies (72%) reported increased revenues and 50 companies (77%) beat revenue estimates.

With 19 of the 24 BKX members reporting, 74% (14 out of 19) beat operating EPS estimates. Bank revenues have disappointed slightly, missing estimates by -1.0% on average. Twelve banks (63%) reported increased revenues over the prior year’s quarter and 13 banks (68%) beat revenue estimates.

Valuation. The SPX trades at 13.5x estimated 2011 earnings ($95.60) and 11.9x estimated 2012 earnings ($108.44), compared to 13.4x and 11.8x respective 2011-12 earnings Friday. The 10-year average median Price/Earnings multiple is 20.0x. Since the beginning of 2010, analysts increased 2011 and 2012 earnings estimates by +3.4%, and +4.2%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +19.3% and +35.3%, respectively.

Large-cap banks trade at a median 1.49x tangible book value and 11.2x 2011 earnings, compared to 1.51x tangible book value and 11.3x 2011 earnings Friday. 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 +35.0%. Analysts’ estimates for bank 4Q2010 earnings are 19.6% 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.

SPX. On lower volume, the SPX rose +7.49 points, or +0.58% to 1290.84. Volume fell -29.2% to 744.40 million shares from 1.05 billion shares Friday, below the 779.74 million share 50-day moving average. For the 66th consecutive day, its 50-day moving average closed above its 200-day moving average (1240.29 versus 1154.08, respectively). The SPX closed above its 200-week moving average (1182.50).

The SPX opened flat. A pre-10:00 rally to 1286 was sold, and the index retreated back to break-even at 10:00. At 10:20, a second rally preserved its momentum, and stocks gained through the remainder of the morning, breaching 1290 just after noon. The SPX traded flat through the 2:00 hour, setting its intra-day at 1291.93 at 2:15. A 3:00 sell-off pushed the index below 1290 and down to 1288. Buyers bought the late dip, and the index rallied above 1290 into the close. The index closed +4.20% above its 50-day moving average, closing above that average for the 98th consecutive day, and +11.90% 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 36th straight session and above 1280 for the 8th straight session. The directional momentum indicator is positive, with a declining trend. Relative strength rose to 67.82 from 64.09, the higher end of a neutral range. Next resistance is at 1294.36; next support is at 1284.90.

BKX. On lower volume, the KBW bank index closed at 53.06, down -0.52 points or -0.97%. The index closed +24.66% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -7.54% below its April 23rd closing high.

Financials underperformed the market, and large-cap banks underperformed regionals. Banks stocks opened flat but slid gradually lower through the morning, falling almost -1.0% to the 53.10 level by 10:20. Buyers stepped in on the move lower, and lifted the index back to 53.30 by 10:45. The index traded sideways through noon when momentum began to wane. Financials returned to the 53.10 level from 1:00 through 3:00, and another 3:00 sell-off sent the index to its intra-day low of 52.86 at 3:26. The first support level of 52.90 held, and the BKX again managed a small closing bell rally to retake the 53.00 level at day’s end. The index closed above 50 for the 25th straight day. Volume fell -41.56% to 127.34 million shares, down from 217.92 million shares Friday, and below the 162.27 million share 50-day average.

Technical indicators are mostly positive. The BKX closed above its 50-, 100-, and 200-day moving averages (50.03, 48.31, and 49.09, respectively), closing above the 200-day average for the 31st straight session. The index closed below its 20-day moving average (53.12) for the third time in four sessions. The 20-, 50-, and 100-day averages increased while the 200-day decreased. The 50-day moving average closed (by +0.94 points) above the 200-day moving average, closing above it for the 8th straight day. The directional movement indicator is positive, but narrow, and trend strength is declining. Relative strength fell to 55.26 from 59.00, the middle of a neutral range. Next resistance is 53.48; next support at 52.74.

Disclosure: I am long BLK, SBNY.

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