Valentine Capital IPC Notes
by Valentine Capital's Investment Policy Committee
Valentine Capital Asset Management
Investment Policy Committee
WEEKLY MARKET and ECONOMIC OUTLOOK
January 21, 2010
The Price is Right
For all the fear of inflation, it just remains absent. Consumer prices fell for the first time in calendar year since 1955 (as we note again below). The trend continues and is broad-based. Food & energy (together) prices are under control and displaying multi-year low levels. For the full year prices less food & energy rose 1.7% which was the weakest increase since 2003. December-to-December prices rose a similar 1.8% and that too was the weakest 12-month gain since 2003. In the latest few months prices remained weak, up an expected 0.1% in December after no change during November. Yet, looked at independently a different price picture shows up. Food & beverage prices remained weak, up just 0.2% in December. Moreover, the 12-month decline of 0.5% remained near the weakest since 1960. Energy prices posted just a 0.2% increase last month but the 19.0% 12-month gain reversed most of the 2008 decline. Gasoline prices rose 0.2%, after a strong 6.4% November rise. They rose by more than half over twelve months and more-than reversed the 2008 decline. Core services prices continued weak. The 0.1% December uptick left them up just 1.3% for the twelve months which was the weakest increase ever. Weakness in the housing market continues to accounts for much of that moderation. Last month, shelter prices were unchanged and rose just 0.3% for the year after a 2.5% 2008 increase. Core goods are more mixed on a pricing measure. Continuing weak were prices for household furnishings & operation which were unchanged in December. The 1.1% decline since the end of 2008 reversed a 2.0% increase in 2008. Tobacco and apparel prices remain firm, rising in December and up in 2009 compared to 2008. So the price (of almost all) is right. What’s not? The usual suspects: healthcare and education costs still going up!
GLOBAL THEMATIC OBSERVATIONS
ECONOMIC UPDATES
MARKET ANALYSIS
EARNINGS DEVELOPMENTS
China said its economy expanded 8.7% in 2009, slightly ahead of expectations and exceeding the official growth target of 8% for the year, as massive fiscal stimulus and bank lending helped the economy escape recession in spite of a drop in global trade. The full year growth rate was also ahead of consensus expectations for an on-year rise of 8.5%, but below the 9.6% recorded in 2008, according to data released by the National Bureau of Statistics. For the fourth quarter, China's gross domestic product expanded 10.7% from a year earlier, slightly missing expectations for a 10.8% expansion.
Germany said according to the January ZEW indicator, the percentage of German investors and analysts optimistic about the outlook six months ahead declined for the fourth month. The percent balance is now 47.2% compared with the recent peak of 57.7% in September, however, it is still well above the long term average of 27.1%.
Source: Investors Business Daily, Wall St. Journal: January 14 – January 21.
U.S. Economic Events & Analysis:
POSITIVE INDICATORS:
Leading economic indicators up: Leading U.S. economic indicators increased 1.1% in December and have risen for nine straight months, suggesting "that the pace of improvement could pick up this spring," according to a report released by the Conference Board today. The rise in the index was stronger than the 0.7% increase expected by economists. Eight of the 10 leading indicators improved in December, a broad-based gain that points to "an economy in early recovery," said Ken Goldstein, an economist for the Conference Board.
Consumer sentiment increases: Improvement in consumer attitudes continues. The Reuters/University of Michigan Index of Consumer Sentiment for mid-January ticked up to 72.8 from 72.5 last month. Though the latest figure fell short of Consensus expectations for a reading of 74.0 it was well improved from the low last fall. Sentiment about current economic conditions increased another 3.8% after its 13.4% jump from November. The latest was the highest level since March of 2008. Assessments of current financial conditions improved modestly m/m to the highest since September of last year. Buying conditions for large household goods, including furniture, refrigerators, stoves & televisions, also moved up 4.7% to the highest level since January 2008.
Industrial output and capacity utilization improving: For the year as a whole industrial production fell 9.7% following a lesser 2008 decline. In June, however, the decline in activity troughed and since then is up 4.7% helped by an expected 0.6% December increase. Capacity utilization rose further to 72.0%, its highest level since December 2008 but for the year as a whole the utilization rate dropped to 70.2%. In the factory sector alone utilization held steady m/m at 68.8% but dropped to 67.0% for the year from 75.0% in 2008. Utilization in the primary metals area has risen sharply to 58.9% from a 2009 average of 51.0% with the rebound in output. There's also been rise in utilization in the motor vehicle sector to 52.2% from a low of 36.8% in June but it was 77.0% in 2005. In rise in utilization was accompanied by a 0.1% m/m decline in capacity which was part of a 1.0% December-to-December decline.
CPI down: For all of 2009, consumer prices declined slightly. The 0.3% drop, the first since 1955, was pulled lower by a decline in energy prices. Since the energy price decline, which mostly happened at the end of 2008, prices picked up. December-to-December the CPI rose 2.7% which was the fastest 12-month increase since October 2008. For December alone, the 0.1% CPI rise fell slightly short of expectations but followed stronger gains during the prior four months which were boosted by the rebound in energy prices.
PPI flat: Prices at the wholesale level increased a seasonally adjusted 0.2% in December, largely owing to a sharp increase in food costs, the Labor Department reported. Core producer prices, excluding volatile food and energy inputs, were unchanged.
Building permits up: The number of building permits rose 10.9% in December to a seasonally adjusted annual rate of 653,000, far above the level of starts and the highest in 14 months, according to the Commerce Department. In December, building permits for single-family homes rose 8.3% to a seasonally adjusted annual rate of 508,000, the highest in 15 months.
Oil down: Crude-oil futures slumped 1.8% on Wednesday, pressured by concerns tighter lending measures in China will curb demand and by forecasts of rising U.S. petroleum inventories. Crude oil for February delivery ended down $1.40, or 1.8%, at $77.62 a barrel. Oil is down from about $80 last week.
Benchmark interest rate down: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.65%, down from 3.78% last week.
CRB Index down: The Reuters-Jefferies Commodity Research Bureau is down -1.38% year-to-date. 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, First Call: January 14 – January 21.
WEAK INDICATORS:
Jobless claims up: First-time claims for state unemployment benefits jumped unexpectedly by the largest amount in eight months, the Labor Department reported Thursday. The number of initial claims in the week ending Jan. 16 rose 36,000 to 482,000. The consensus forecast of Wall Street economists was for claims to inch lower to 438,000. This is the highest level of claims since November. The four-week average rose 7,000 to 448,250. This is the first increase after 19 straight declines. Claims in the previous week were revised to an increase of 13,000 to 446,000 compared with the initial estimate of an increase of 11,000 to 444,000. Overall, a record 12 million Americans received federal and state unemployment benefits on an unadjusted basis in the week ended Jan. 2, the latest period for which the data is available. This is up from 10.9 million in the prior week.
Housing starts down: For all of 2009, an estimated 554,000 homes were started, down 39% from 2008's total of 906,000 and the lowest since 1945. Starts of single-family homes dropped 29% to 444,000 in 2009, the lowest on record, dating to 1959 (all according to the Commerce Department). U.S. housing starts fell 4% to a seasonally adjusted annual rate of 557,000 in December from 580,000 in November, the Commerce Department estimated. However, the December estimate of 557,000 was better than the 540,000-unit rate expected in the median forecast of economists.
Home builders confidence down: The home builders' sentiment index declined to 15 in January from 16 in December, the National Association of Home Builders reported. The index, now at the lowest since June, has declined in three of the past four months. At 15, the index indicates that about one-in-six builders thinks the market is "good."
“Misery” index highest in nearly 30 years: The U.S. economic recession brought with it the highest level of misery in almost 30 years. The December misery index reached 12.7% which was up from 11.8% during November. The index is calculated as the sum of the unemployment rate and the y/y change in the consumer price index. Not only was the index level its highest since 1983, but the 5.2 point increase versus December '08 was the quickest since the "credit crunch" recession of 1980.
Sources: Economy.com, Bloomberg, MarketWatch, IBD week of: January 14 – January 21.
The Market: 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 71% since March 6th). The most apparent leadership in the global equity market is China. Seven of the worlds’ top 15 stocks are based in China. Year-to-date major index performance: S & P 500 2.1%, DJIA 1.7%, NASDAQ 1%, and the S & P 600 1.9%. 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 14: 368 new highs & 3 new lows, January 15: 237 new highs & 4 new lows, January 19: 409 new highs & 9 new lows, and January 20: 184 new highs & 11 new lows. Industry Group analysis: year-to-date, 157 out of 197 groups we monitor are positive.
Source: Investors Business Daily. January 14 – January 21.
**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. 157 of the 197 industry groups we monitor are up year-to-date, down from 167 last week.
Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.58%, 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 18.6, same as last week and down from 23.7 one month 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 is 18.9%, up from 15.9% last week, but 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 52.2. 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 14 – January 21.
● Earnings & Company Developments: Strength in the arena of earnings is evident. 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. In fact, earnings of reported firms are up 167.7% year over year, according to Zacks Investment Research. However, the rest of the new earnings strength is not simply due to easy comps. Strong 26.7% total net income growth expected for 2010, with 20.4% more expected for 2011. 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: CitiGroup reported its net loss to 7.58 billion U.S. dollars in the fourth quarter last year, in line with analysts' expectations, according to its earnings result released on Tuesday. Citi, which suffered most among major U.S. banks from the financial crisis, reported a loss of 33 cents a share, compared with a loss of 3.40 dollars per share one year earlier. For the full year 2009, Citi's loss was 1.6 billion dollars, or 80 cents a share. Citi's revenue fell 4.3 percent to 5.41 billion dollars in the fourth quarter, according to the bank's statement.
Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, January 14 – January 21.
On This Day:
January 21, 1976 -- The supersonic Concorde jet was put into service by Britain and France.
Source: history; about.com
Notable & Quotable: on Positive Attitude
“I respect faith, but doubt is what gets you an education.”
Wilson Mizner, US screenwriter (1876 - 1933)
Go Figure:
WORK OR LACK THEREOF: There were 14.9 million unemployed Americans as of the end of August 2009, not counting an additional 9.1 million individuals that are working part-time today only because they have been unable to find full-time employment. The number of Americans that fall into this part-time worker category has increased by 3.3 million in the last 12 months (source: Department of Labor).
Valentine Capital Asset Management, Inc.
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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.
