This morning. Equity futures are higher this morning, with March SPX futures at 1243.30, up +4.49 points after fair value adjustment. The SPX and NASDAQ open today at fresh 2010 and two-year highs, but on Friday closed mixed, on heavy options expiration-driven volumes. The equity uptrend is under pressure as markets consolidate substantial recent gains. Distribution days dropped to 2 on the SPX and NYSE and 4 for the NASDAQ. Next SPX resistance is at 1246.52. Next support is at 1240.58.
Asian equity markets closed lower. The Nikkei, Hang Seng, and Shanghai indexes closed -0.85%, -0.33%, and -1.41%, respectively, hurt by the Koreas’ continuing disputations and inflation concerns. European equity markets are higher, with the Eurostoxx50 +1.18%, FTSE +0.50%, and DAX +0.99%. On the EuroStoxx, financials are a middling performer, but up +1.17%.
LIBOR trends remain unremarkable. Overnight USD LIBOR is 0.24125%, up from 0.23813% Friday. USD 3-month LIBOR is 0.30281, down from 0.30375% the prior day. In early trading, the dollar is slightly stronger against the euro, but weaker against the yen and pound. The euro trades at US$1.3152, compared to US$1.3185 the prior day and USD$1.3244 the day before. The dollar trades at ¥83.74, compared to ¥83.98 Wednesday and ¥83.91 the prior day. U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.589% and 3.301%, respectively, compared to 0.605% and 3.328% Friday. The yield curve spread narrowed to +2.712% from +2.723% Friday. 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 higher, with higher petroleum and natural gas, precious metals, aluminum, copper, and agricultural prices.
U.S. news. The lame duck session of the 111th Congress continues to grind forward, moving toward passing a continuing budget resolution to fund the government through next Monday. Today’s sole economic report was the Chicago Fed national activity index, with reported -0.46 versus prior -0.28. The FDIC close 6 banks over the weekend, bringing the total number of failures this year to 157. The largest was Bank of Miami, purchased by 1st Unite Bancorp of Boca Raton.
Overseas news. Sell-side research analysts cautioned that France could lose its AAA credit rating given French banks’ exposure to peripheral Euro-zone bonds. In November, Germany’s producer price index rose 4.4% over the prior year, beating estimates. Pyongyang has agreed to re-allow nuclear inspections, according to reports. South Korea’s military drills proceeded without retaliation. Unexpectedly, Hungary raised its benchmark interest rate 25 basis points to 5.75% over inflation concerns.
Company news/research:
- [[GS]] – 4Q EPS lowered to $3.85 from $4.15 at C, reiterates buy
- [[JPM]] – 4Q EPS lowered to $1.02 from $1.06 at C, reiterates buy
- [[MS]] – 4Q EPS lowered to $0.42 from $0.55 at C
- [[BAC]] – 4Q EPS raised to $0.36 from $0.25 (on one-time items) at C, reiterates top pick
- [[AXP]] – downgraded to hold at Stifel
- [[ HBAN]] – raised to outperform at BofA/ML, $7 price target
- JEF – reports $0.35 per share on revenues of $695 million, beating estimates for both metrics
Friday’s equity markets. Volumes spiked on options expiration, but the major indexes closed mixed, as the SPX and NASDAQ closed fractionally higher, but at fresh 2010 and 2-year highs, while the DJI and NYSE composite both lost -0.06% on the day. Early weakness eased in afternoon trading, but markets continue to find strong resistance at 1246 on the SPX and 11500 on the DJI, but support, too, on any sell-off. Basic materials, consumer goods, and utilities were the best performing market segments. Oil and gas, industrials, and telecommunications were the worst. In December, the NASDAQ leads the other major indexes, up +5.79%, compared to the SPX, DJI, and NYSE, up +5.37%, +4.41%, and +5.44%, respectively. The uptrend remains under pressure as the market consolidates its recent gains.
Futures were mixed, and markets opened lower, but found support at 1240 on the SPX shortly before 11:00. Markets rallied through 3:00, but failed to break significantly higher. Greenspan appeared on CNBC and gave a brighter picture of 2011 growth, looking for a +3-3.5% rise in U.S. GDP and unemployment backing down to less than 9.0%. Sentiment is clearly improving, to an extent some trading desks cite it as a concern. Financials benefited from the Marshall & Isley acquisition, but clearly underperformed in the past week, after leading the market through the month’s first half.
Technical indicators are generally positive. Major indexes are at least +9.05% higher in 2010, with the NASDAQ and SPX at new yearly highs, and the DJI and NYSE fractionally below their yearly highs. All major indexes closed above their respective 200-week and 20-, 50-, 100-, and 200-day averages. Markets are in a generally bullish configuration, with 50-day moving averages above respective 200-day moving averages. Directional movement indicators are positive, and the trend is strengthening. Short-term relative strength indicators have moved back into the upper end of a neutral range. Market volatility fell to its lowest reading since April 21st. The VIX closed down -7.36% to 16.11 from 17.39 at Thursday’s close.
Market sentiment is improving. The latest week’s (December 16th) AAII Investor Bullish Sentiment index remains quite elevated, but fell -5.32% to 50.23 from 53.05 on December 9th. Sentiment indicators are highly variable, but this reading is probably best read as bearish.
After 4 consecutive days of underperformance, financial stocks turned in a middling result, with the XLF, BKX, and KRX ending up +0.19%, +1.21%, and +0.31%, respectively. Announcement of Bank of Montreal’s acquisition of regional bank Marshall & Isley particularly benefited the BKX. While the broader indices are near two year highs and have recovered their post-September 2008 losses, financial stocks have not, with the BKX closing -13.6% below its April highs and -39.3% below its best level in September 2008.
NYSE Indicators. Due to quadruple witching expiration, volumes rose materially, up 104.0% to 2.019 billion shares, from 989.84 million shares the prior day, above the 1.064 billion share 50-day moving average. Market breadth was positive, and up volume exceeded down volume. Advancing stocks led decliners by +346 (compared to +203 Thursday), or 1.26:1. Up volume led down volume by 1.52:1.
3Q2010 Earnings. Earnings results have generally exceeded EPS and revenue expectations. Of the 481 S&P500 companies that reported earnings to date, 76% (364 of 481) beat operating EPS estimates, versus the historical average of 62%. Companies beat by an average of +6.4% (versus a historical average of +2%). EPS is up +31.3% over the prior year. Though challenged in the current operating environment, 384 companies (80%) reported increased revenues and 293 companies (61%) beat revenue estimates. With all 24 BKX members reporting, 79% (19 out of 24) beat operating EPS estimates, with a +25.3% average operating EPS surprise. Bank revenues disappointed slightly, missing expectations by -0.30% on average.
Valuation. The SPX trades at 14.6x estimated 2010 earnings ($85.49) and 12.8x estimated 2011 earnings (increased to $97.24 from $96.91), compared to 14.6x and 12.8x respective 2010-11 earnings Friday. The 10-year average median Price/Earnings multiple is 20.0x. Since the beginning of the year, analysts increased 2010, 2011, and 2012 earnings estimates by +12.1%, +5.1%, and +5.6%, respectively. Analysts expect 2011 and 2012 earnings to exceed 2010 earnings by +13.7% and +28.6%, respectively.
Large-cap banks trade at a median 1.44x tangible book value and 13.4x 2011 earnings, compared to 1.43x tangible book value and 13.4x 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 +34.2% and expect 4Q2010 earnings to exceed 3Q2010 earnings by +22.7%. In 3Q2009, large-cap banks earned a combined $5.91 per share while the BKX Index earned -$1.24 per share. In 3Q2010, large-cap banks earned $13.78 and the BKX earned $0.71 per share.
SPX. On higher volume from options expiration, the SPX rose +1.04 points, or +0.08% to 1243.91, its 6th increase in seven sessions and a new two-year closing high. Volume rose 117.0% to 1.70 billion shares from 782.82 million shares Thursday, above the 854.65 million share 50-day moving average. For the 42nd consecutive day, its 50-day moving average closed above its 200-day moving average (1200.46 versus 1141.53, respectively). The SPX closed above its 200-week moving average (1186.66).
The SPX opened lower, yawning at Washington’s tax-package completion the prior night. Losses were immaterial, and the index found support at 1240. A steady rally after 10:45 took the index back to break-even, where it traded in a narrow range until the rally refreshed at 1:00. The index traded to an intra-day high of 1245.81 shortly before 2:00, and hovered there until selling pressure pulled markets lower at 3:00. Dropping back to break-even, the SPX managed another rally in the final 15 minutes to set the week’s 4th two-year closing high, at 1243.91. The SPX closed +3.62% above its 50-day moving average (1120.46), closing above that average for the 74th consecutive day, and +8.97% above its 200-day moving average (1141.53). The SPX closed above its April-high closing level of 1217.28 for the 12th straight session. The 20-, 50-, 100-, and 200-day moving averages rose.
Technical indicators are positive. The SPX closed above its April highs for the twelfth straight session and set the week’s fourth two-year closing high. The directional momentum indicator is positive, with a stable trend. Relative strength rose to 66.77 from 66.37, the high end of a neutral range. Next resistance is at 1246.52; next support is at 1240.58.
BKX. On higher volume, the KBW bank index closed at 50.08, 49.48, up +0.60 points or +1.21%. The index closed +16.52% above its August 30 closing low of 42.98, the trough of the recent prior correction, but -13.6% below its April 23rd closing high.
Helped by the MI acquisition, financial stocks outperformed the SPX, and large-caps outperformed regionals. The BKX gapped higher at the open, fueled by BMO’s $4.1 billion purchase of MI, the largest bank take-over since PNC’s acquisition of NCC in 2008. The BKX fluctuated at high levels as investors digested the take-over valuations and laterals to other regional banks. Lifting with the broader markets on the 1:00 rally, the index set an intra-day high of 50.25 at 1:30. Like the SPX, sellers took profits at 3:00, sending the index back towards 50.0 before small rally hit into the close. The BKX finished up 1.21% at 50.08, its first close above 50.0 since Monday. Volume rose 76.2% to 309.60 million shares, up from 175.66 million shares Thursday and above the 173.48 million share 50-day average.
Technical indicators are positive. The BKX closed above its 20-, 50-, 100-, and 200-day moving averages (47.62, 47.00, 46.76, and 48.99, respectively), closing above the 200-day average for the sixth straight session. The 20-, 50-, 100-, and 200-day averages all increased. The 50-day moving average closed (by -1.99 points) below the 200-day moving average, as it has since August 16th. The directional movement indicator is positive, with a stable trend. Relative strength rose to 63.15 from 60.29, the higher end of a neutral range. Next resistance is 50.39; next support at 49.62.
Disclosure: I am long GS, JPM, BAC, AXP, HBAN, MI.
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