Valentine Capital IPC Notes
by Valentine Capital's Investment Policy Committee
Valentine Capital Asset Management
Investment Policy Committee
WEEKLY MARKET and ECONOMIC OUTLOOK
January 7, 2010
New Year, New Decade & Continued Bull Market
2009 was the best year for the stock market in percentage terms since 2003. The S & P 500 gained 23.5% before dividends, closing at 1115 (up 26.46% including dividends). As we have repeatedly noted, the index soared dramatically from its’ March 6 intraday low of 666, advancing over 67%!(before dividends). An obvious observation is the difference between the extreme move from the March low and the indexes’ full year gain. The answer lies in just how bad January, February and the days leading up to the market lows of last year were. The year began with the S & P 500 plunging 8.6% January, registering the worst opening month to a new year in the 81-year history of the index. January closed last year with an economic report showing Q4’08 GDP fell -3.8%, the worst since 1982. Unemployment had reached 25-year highs and stock dividends were tracking to fall the most since 1938. The business news just before the March low was dominated with the story of General Motor’s bankruptcy. Still caught in the grasp of the vicious bear market of 2007-09, many investors refused to believe an uptrend was under way as stocks were bouncing back and the follow-through day of March 12 proved to be a deathtrap for the bears.
GLOBAL THEMATIC OBSERVATIONS
ECONOMIC UPDATES
MARKET ANALYSIS
EARNINGS DEVELOPMENTS
China reported its central bank guided interbank interest rates higher Thursday, the latest in a series of moves that analysts say indicate a "tightening bias" and could lay the groundwork for an eventual rate hike. The change in yield marked the first in its weekly open-market operations since Aug. 13. Overall, the economy of China continues to expand. New data this week showed China continued its ascent into economic superpower status, rising above Germany as the world's top exporter and overtaking the U.S. in domestic auto sales, according to reports. China exported $957 billion worth of goods in the first 10 months of 2009 compared with $917 billion by Germany, according a report Wednesday in The Wall Street Journal.
Euro zone industrial orders and producer prices were weaker than expected for the 16-nation bloc for December. This suggests a fragile recovery and little inflationary pressures.
Germany said its number of unemployed workers fell unexpectedly by 3,000 in December, marking the sixth consecutive month of declines as Europe's largest economy continues to recover from its deepest post-war recession.
Source: Investors Business Daily, Wall St. Journal: December 30 – January 7.
U.S. Economic Events & Analysis:
POSITIVE INDICATORS:
Factory orders up: Factory orders increased 1.1% in November, greater than the 0.8% expected by economists, the Commerce Department reported. Further, October's orders were revised higher by two-tenths of a percent to 0.8%.Shipments of factory goods rose 1.0% in November, including a 0.2% rise in durable-goods shipments. Shipments have been higher in five of the past six months but are still down 17.0% in the past year. Inventories rose 0.2% in November for the second straight monthly gain. Inventories had been extremely lean; the increase is a sign manufacturers want to restock shelves, economists said.
US Manufacturing up: The U.S. manufacturing sector expanded in December for the fifth straight month, the Institute for Supply Management reported Monday, further evidence that the recession is receding. The ISM manufacturing index rose to 55.9% from 53.6% in November. It was the highest since April 2006. Economists surveyed were expecting a modest gain to 54.2%. Readings over 50% indicate that more manufacturing firms said business was improving than said it was worsening. In December, nine of 18 industrial sectors were growing, led by apparel, petroleum, electronics and machinery. ISM said. Manufacturing is benefiting from the need to restock inventories, said the chairman of the ISM's survey committee. The employment index rose to 52% from 50.8% in November. The production index rose to 61.8% from 59.9% in November. The supplier delivery index rose to 56.6% from 55.7%.
Service sector activity up: The service sectors of the U.S. economy rebounded in December, according to a survey of companies released Wednesday by the Institute for Supply Management. The ISM non-manufacturing index rose to 50.1% from 48.7% in November. Readings above 50% in the diffusion index indicate that activity at more firms is expanding rather than contracting. The index had been above 50% since August but then fell below the threshold in November. The ISM employment measure rose to 44% in December from 41.6% in November.
Planned layoffs drop: Big U.S. companies announced 45,094 job reductions in December, the fewest since the recession began two years ago. December's total was down 10% from November's 50,349 and down 73% from December 2008, according to outplacement firm Challenger, Gray & Christmas. In the fourth quarter, companies announced just 151,121 job reductions, the fewest since early 2000 and down 67% from the fourth quarter of 2008, Challenger said. For all of 2009, big companies announced 1.288 million job cuts, up about 5% from 2008's total and the most since 2002. About 70% of the year's total occurred in the first six months of the year. "Somewhere in the second or third quarter, we turned a corner and, now, as we begin 2010, there are promising signs of continued improvement," said John Challenger, chief executive officer of Challenger, Gray & Christmas. "It is a promising sign of fewer job cuts in 2010."
Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call: December 30 – January 7.
WEAK INDICATORS:
Jobless claims up (slightly): The number of people filing initial claims for state unemployment benefits was essentially unchanged in the week of Jan. 2, rising by just 1,000 to a seasonally adjusted 434,000 after large declines the previous two weeks, the Labor Department reported. The total number of people collecting unemployment benefits of any kind, including extended federal benefits but not seasonally adjusted, rose by 518,100 in the week of Dec. 19 to a record 10.6 million. The number of people collecting under the extended federal program rose by 620,000 to a record 5.5 million. The four-week average of initial claims (often favored by analysts because it smoothes out one-time distortions caused by bad weather, holidays and strikes) fell by 10,250 to 450,250. That's the lowest since September 2008, just before the near-collapse of the financial system.
Construction spending down: The Commerce Department said construction outlays fell 0.6% in November after a downwardly revised 0.5% decline in October. It was the seventh straight decline in construction spending. To further underscore the weakness, the government said spending fell 0.5% in October, compared with the initial estimate of no change. Year over year, construction spending is down by 13.2% in November. Spending on private commercial construction projects fell slightly in November for the eighth consecutive monthly decline. Non-residential construction is down 20.6% in the past year.
Pending home sales fall: Pending home sales plunged a seasonally adjusted 16% from October to November as a highly popular tax credit for first-time buyers was set to expire on Nov. 30, the National Association of Realtors reported. The pending sales index, which had risen nine months in a row before falling in November, was 15.5% higher than in November 2008. October's increase was revised higher to 3.9% from 3.7% previously reported.
Oil up: Crude futures rose $1.41yesterday to settle at $83.18, a 15-month high. Oil has jumped nearly 14% from $73 just two weeks ago, and over 21% since early December.
Benchmark interest rate up: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.81%, up from 3.59% two weeks ago.
CRB Index up: The Reuters-Jefferies Commodity Research Bureau is up 3.66% 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: December 30 – January 7.
The Market: Stock market participants were all back by Tuesday. Trade topped the 50-day average for the first time since Dec. 18 on the Nasdaq. This positive climb in volume, coupled with a higher close, underscores the bullish market mode. 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 70.7% since March 6th). Year-to-date major index performance: S & P 500 2%, DJIA 1.4%, NASDAQ 1.4%, and the S & P 600 1.7%. 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: December 31: 241 new highs & 16 new lows, January 4: 401 new highs & 11 new lows, January 5: 541 new highs & 3 new lows, and January 6: 563 new highs & 8 new lows. Industry Group analysis: year-to-date, 167 out of 197 groups we monitor are positive.
Source: Investors Business Daily. December 30 – January 7.
**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. 167 of the 197 industry groups we monitor are up year-to-date.
Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.59%, 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 18.2, down from 23.7 two 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 16.9%, about the same as 16.7% two 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 48.3. 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. 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. December 30 – January 7.
● 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. 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: No companies to report.
Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, December 30 – January 7.
On This Day:
January 7, 1789 -- The first U.S. presidential election was held. Americans voted for electors who, a month later, chose George Washington to be the nation's first president.
Source: history; about.com
Notable & Quotable: on a New Year
“Now there are more overweight people in America than average-weight people. So overweight people are now average. Which means you've met your New Year's resolution.”
Jay Leno
Go Figure:
MOVING ON UP: Since 2005, China has moved from the world’s 7th largest economy to the 3rd largest today. China has passed Italy, then France, then the UK, and most recently Germany. Only the economies of Japan and the U.S. are larger (source: The Economist).
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.
