Valentine Capital IPC Notes
by Valentine Capital's Investment Policy Committee
Valentine Capital Asset Management
Investment Policy Committee
WEEKLY MARKET and ECONOMIC OUTLOOK
January 14, 2010
Almost 7
Santa Claus Rally, January Effect, January Barometer and other creatively named stock market theories exist to explain year-end/new year stock market advances. Another, The First Day Effect, is noteworthy. Since 1973, a big advance on the first trading day of January has led to strong gains for the stock market the rest of the year. This year the Dow climbed 155 points on day 1 (a 1.5% move). A gain above 1% on the first day of the year has resulted in a positive year 86% of the time over the last nearly 40 years. Further, according to Schaeffer Investment Research, the average gain in those years up big the first day has been 14.7% for the S & P 500. This year’s positive start didn’t stop day 1. The S & P 500 rose every day until this Tuesday, which ended down for the first time after 6-straight up days to kick-off the new year. This was close to being up 7 days in a row which would have tied a record set in 1987.
GLOBAL THEMATIC OBSERVATIONS
ECONOMIC UPDATES
MARKET ANALYSIS
EARNINGS DEVELOPMENTS
China reported its People's Bank of China increased bank reserve ratios and nudged interest rates higher in the interbank market Tuesday for the second time in a week in a sign that authorities may be trying to cool the rapid growth in that country's economy. The central bank ordered a boost in the yuan reserve requirement ratio for banks by 50 basis points, or half a percentage point, effective Jan. 18, according to a statement on its Web site. The current ratio is 15.5% for large banks and 13.5% for smaller banks.
India said its industrial production in India increased 3.0% from 298.8 in October to 307.8 in November and was 11.7% greater than November 2008. This follows October's year over year increase of 10.4%. The production of electricity was down 1.7% for the month but was 3.3% above the year ago level.
Germany said its economy shrank 5% in 2009, posting its biggest contraction since the Second World War, as demand for its exports -- historically a major driving force of growth -- plummeted, official preliminary data showed.
Source: Investors Business Daily, Wall St. Journal: January 7 – January 14.
U.S. Economic Events & Analysis:
POSITIVE INDICATORS:
Beige Book shows improvement: Economic conditions continue to improve "modestly" as 2009 came to a close, according to the Federal Reserve's latest snapshot report on the economy, nicknamed the Beige Book. Ten of 12 Fed districts reported some increase in activity or improvement in conditions, up from eight in the last report in early December. The all-important Christmas retail season was better than weak season in 2008, but still far below 2007, the report said. Service sector activity picked up in most districts. Manufacturing also held steady or increased, the survey found. The labor market remained generally weak.
Consumer credit usage down: The Federal Reserve reported that consumer credit outstanding fell by a record $17.5 billion month-over-month during November following a $4.2 billion October decline that was revised slightly deeper from the initial report. The latest was the fourteenth monthly drop since summer 2008. Moreover, the 3.9% y/y pullback in credit outstanding set another historic record as consumers retrenched and took account of debt-laden personal balance sheets along with job market deterioration. Consumer credit outstanding as a percentage of disposable income fell to 22.1% from its 2005 high of 24.7%.
Oil down: Crude oil for February delivery finished down $1.14, or 1.4%, at $79.65 a barrel at the New York Mercantile Exchange. The contract earlier slumped more than 2%. This is down from over $83 last week. The Energy Information Administration reported bigger-than-expected increases in U.S. supplies of crude and distillates. The EIA said crude-oil supplies rose by 3.7 million barrels in the week ended Jan. 8. Analysts polled by Dow Jones expected inventories to rise by 1 million barrels, while those surveyed by Platts expected a 1.9-million-barrel increase.
Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call: January 7– January 14.
WEAK INDICATORS:
Jobless claims up: First-time jobless claims rose last week by the largest amount in five weeks, surprising economists who had expected a decline. Initial claims rose by 11,000 to 444,000 in the week ended Jan. 9, the Labor Department reported today. This is the highest level since mid-December. However, the average number of workers filing claims over the past four weeks fell by 9,000 to 440,750. This is the lowest since late August 2008, just prior to the near-collapse of the financial system.
JOLTS still low: The Bureau of Labor Statistics continued to indicate little improvement in hiring, but layoffs have diminished. In its Job Openings & Labor Turnover Survey (JOLTS) job availability during November fell 6.1% from October and is off 27.1% year-to-year. The series dates back to December 2000. As a result of the decline the job openings rate fell to 1.8% and remained off sharply from the 3.1% rate before the current recession began.
Retail sales down: U.S. retail sales fell a seasonally adjusted 0.3% in December on widespread weakness across different kinds of stores, the Commerce Department estimated today. The decline was unexpected, as economists surveyed by MarketWatch were forecasting a 0.5% gain. The good news, though, Sales in October and November were revised up, softening the shortfall in December. November's sales were revised to a 1.8% gain from the 1.3% previously reported. October's sales were revised up a tenth point to 1.2%. Sales for all of 2009 fell 6.2% compared with 2008 to $4.14 trillion. That's the largest decline on record, dating back to 1992. And it was only the second decline on record; the other was the 0.5% drop in 2008.
US deficit climb continues: The U.S. government ran a budget deficit of $91.8 billion in December, marking the 15th straight month in which outlays exceeded receipts, the Treasury Department reported. The December figures bring to $388.5 billion the deficit for the first three months of Washington's 2010 fiscal year. That's on top of a staggering $1.4 trillion budget shortfall for fiscal 2009, more than three times the size of the deficit that the government ran in 2008. The federal deficit for December 2008 was $51.7 billion. Receipts were $219 billion in December, the Treasury reported, while outlays were $311 billion.
US small business optimism drops: The National Federation of Independent Business (NFIB) reported their December small business optimism index dipped 0.3% to 88.0. This second consecutive slight decline followed several months of increase after reaching a March low of 81.0. During the last ten years, there has been an 85% correlation between the level of the NFIB index and the two-quarter change in real GDP.
FORECLOSURES up to all-time high: The number of U.S. residential properties receiving at least one foreclosure filing jumped 21% in 2009 to a record 2.82 million, RealtyTrac, an online foreclosure marketplace, reported today. The report also showed that 2.21% of all U.S. housing units (1 in 45) received at least one foreclosure filing during the year, up from 1.84% in 2008, 1.03% in 2007 and 0.58% in 2006. Just four states -- California, Florida, Arizona and Illinois -- accounted for more than half of the nation's 2009 total, with more than 1.4 million properties receiving a foreclosure filing. A total of 632,573 California properties received a foreclosure filing in 2009, the nation's largest state foreclosure activity total, an increase of nearly 21% from 2008.
Benchmark interest rate flat: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.78%, about same as 3.81% last week.
CRB Index up: The Reuters-Jefferies Commodity Research Bureau is up 0.62% year-to-date. This is on top of a record breaking year in 2009. The widely followed CRB index shot up 24% last year, topping the 1973 increase sparked by the oil crisis. Copper, one of the 19 index components soared 140%, while sugar more than doubled and oil ran up about 80%.
Sources: Economy.com, Bloomberg, MarketWatch, IBD week of: January 7 – January 14.
The Market: Clear leadership in the current stock market rally has been technology, led by a 70% surge in the Philadelphia semiconductor index in 2009. However, recent selling pressure has knocked the index down 3% from just reached 52-week highs. The stock market closed 2009 in a confirmed uptrend, but leaving market mavens mixed on the case for a second “leg” up. A study of the 7 bear markets like the 2007-2009 bear since 1900 shows pull backs (corrections) after stellar advances like we have recently seen, followed by a second run up. Market leadership is now shared by the small cap sector and technology. From March to late September, the small-cap S & P 600 led the indexes. It then began to lag after a choppy market churn in September. So far in December, small caps have taken the lead again, along with chipmakers. Financials and consumer discretionary sectors are also strong. As we have noted, the S & P 500 has not had a pullback exceeding 7% since the market rally began in early March (the S & P 500 is up 72% since March 6th). Year-to-date major index performance: S & P 500 2.7%, DJIA 2.4%, NASDAQ 1.7%, and the S & P 600 2.5%. Since December 21, new highs have been dominating new lows by a massive margin. New highs have averaged 400, while new lows about 10 - a bullish ratio. Here are the past week’s results: January 7: 382 new highs & 5 new lows, January 8: 471 new highs & 8 new lows, January 11: 663 new highs & 5 new lows, January 12: 209 new highs & 6 new lows, and January 13: 263 new highs & 10 new lows. Industry Group analysis: year-to-date, 183 out of 197 groups we monitor are positive.
Source: Investors Business Daily. January 7 – January 14.
**The Standard & Poor’s 500 (S&P500) is unmanaged group of securities considered to be representative of the stock market in general.
**The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.
**NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.
**The Standard & Poor’s 600 (S&P600) is an unmanaged group of securities, relating to the small cap segment of the U.S. equities market, covering approximately 3% of the U.S. equities market.
***Indexes are unmanaged and cannot be invested into directly. Investing in limited sectors may increase the overall volatility of a portfolio.
Bull/Bear Barometer:
New confirmed uptrend underway: BULLISH
Industry group strength broad : BULLISH. 183 of the 197 industry groups we monitor are up year-to-date, up from 167 last week.
Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.57%, down from 4.45% March 9, which was a 5-year high.
Volatility index up: BEARISH. Also known as the ‘Fear index’, the VIX (volatility index) is 18.5, down from 23.7 three weeks ago. The VIX has dropped from over 50 near the market bottom in March. According to FactSet Research, the VIX spiked to record highs of between 81 and 96 in late October, then peaked at 103.4, as panic gripped markets worldwide. This contrarian indicator is considered bearish as it reads investors become less fearful. Since its introduction in 1993, VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility.
Investors Intelligence survey shows rising optimism: BEARISH. The Investors Intelligence Advisors Sentiment index, which gauges the stock advice of about 150 newsletters and other paid market-advice outlets, is now at new extreme levels. The “Bearish” sentiment slid to 15.9%, down from 16.7% 3-weeks ago, and still near a 5-year low. Further, it is the lowest since June of 2003. While this contrarian stock market indicator is bearish, the NASDAQ rose 32% from June ’03 to January ’04. “Bullish” professional sentiment 53.4. The 5-year high is 62.9.
Bear Perspective: Bull market or Bear market rally?? Both provide impressive gains, especially over the short-term. During the October of 1929 to July 1932 bear market the Dow lost 89% of its value. During that time there were 7 large rallies exceeding 27%. For example, the bear market rally that began in October 1931 lasted 35 calendar days and resulted in a gain of 35%. Additionally, a more powerful bear market rally ensued in 1932 when an early August to late September advance exceeded 100% before another leg down, losing over 30%. Japan’s Nikkei showed 4 huge up moves of 50% or more during its prolonged bear market, losing 74% of its value.
Sources: Wall St. Journal, IBD, Thompson First Call, Zacks, Stock Traders Almanac, AlphaTrends. January 7 – January 14.
● Earnings & Company Developments: We have continually stated that the earnings story for the S & P 500 would have a happy ending in 2009 due to relative comparisons to the end of 2008. 4Q earnings season about to get underway; early results positive, with positive earnings surprises outnumbering disappointments by 7:1. Even though full year 2009 earnings declined, the 9.26% loss was a relative positive compared to the 22.24% fall in 2008. The biggest beneficiary of relative “comps” is Q409. Total earnings in the fourth quarter are expected to be more than double year-ago levels, up nearly 120%. Total net income for the quarter is being compared to Q408 when the S & P 500 saw a tremendous fall of over 35%! Looking ahead, the earnings forecast by Zacks Investment Research is positive. S&P500 expected to earn $554.4 billion in 2009, $700.4 billion in 2010 (a 26.4% jump), $843.8 billion in 2011 (a gain of 20.5% in earnings). Two sectors, Financial and Energy, to account for 50.2% of all incremental earnings in 2010 over 2009, and 51.7% of all incremental 2011 over 2010 earnings, although they account for just 25.2% of total market capitalization. Companies of interest: Chevron Corp. said weak profit margins from its vast refining and marketing operations will weigh on its overall fourth-quarter results. The company said in an interim update that earnings from its upstream business, exploration and production, would likely be in line with its third-quarter 2009 results, benefiting from a steady rise in energy prices through the last months of the year. Chevron also said downstream operations -- refining and marketing -- have been hurt by those same rising oil prices, the cost of which Chevron has not been able to pass down to the pump due to a weak economy and slack demand for fuel.
Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, January 7 – January 14.
On This Day:
January 14, 2004 -- Former Enron finance chief Andrew Fastow pleaded guilty to conspiracy as he accepted a 10-year prison sentence.
Source: history; about.com
Notable & Quotable: on Positive Attitude
“A positive attitude may not solve all your problems, but it will annoy enough people to make it worth the effort.”
Herm Albright, German painter (1876 – 1944)
Go Figure:
FROM THE BEAR LOW POINT : Since hitting a bear market intra-day low of 666 on 3/06/09 (about 10 months ago), the S&P 500 has gained 72% (not counting the impact of reinvested dividends). The average gain of the S&P 500 for the 1-year following a bear market closing low for the 8 bear markets of the last 50 years is +36.5% (i.e., the latest bear is the 9th bear market of the last half century). The best 1-year return took place in 1982-83 following the 1981-82 bear market and produced a +58.3% gain (source: BTN Research).
Valentine Capital Asset Management, Inc.
6111 Bollinger Canyon Rd. Ste 100, SAN RAMON, CA 94583
www.valentinewealth.com · 925.275.0200
The opinions and forecasts expressed herein are informational in nature and may or may not come to pass. The information provided should not be considered specific recommendations or investment advice. Information contained herein is based on sources and dates believed reliable, but is not guaranteed. CA Insurance License ##0A72947.
