Valentine Capital IPC Notes
by Valentine Capital's Investment Policy Committee
Valentine Capital Asset Management
Investment Policy Committee
WEEKLY MARKET and ECONOMIC OUTLOOK
October 1, 2009
Octo-phobia
It can be said that the stock market crashed three times and each of those disasters happened in October. The first crash was the beginning of the great market implosion that helped usher in the Great Depression: October 29, 1929. The Dow plunged 12.85% that day. Topping that was the crash of Oct. 19, 1987. The Dow lost 22.6% of its value in one day. Now for more current history. Last October nearly tops the list of market melt downs. The problems started months before, but October was the worse month in a string of bad ones. The S&P 500 was down by more than 27% at one point in the month. No wonder investors fear October. Now, here’s a different perspective: October may be both "the jinx month" for its history of market crashes and a "bear killer". Beyond the obvious headline-grabbing October stock crashes, October has also stopped most bear markets. October has been the reversal month, ending 11 bear markets since World War II, according to the Stock Trader's Almanac.
GLOBAL THEMATIC OBSERVATIONS
ECONOMIC UPDATES
MARKET ANALYSIS
EARNINGS DEVELOPMENTS
Japan said its closely watched tankan survey of business sentiment showed expected improvement for a second quarter in a row but offered a more downbeat picture for future capital spending..
China’s reported one of its two Purchasing Managers Index rose to 54.3 in September from 54.0 in August, according to reported data Thursday from the China Federation of Logistics and Purchasing. The index has now remained above 50 for seven months in a row.
Euro-zone said its unemployment rate in the 16-nation rose to 9.6% in August, up from 9.5% the previous month and the highest since March 1999, the statistics agency Eurostat reported Thursday. The agency said 165,000 persons joined the unemployment rolls in August, bringing the total number of unemployed to 3.224 million.
Germany reported its retail sales declined in August, official data showed today, highlighting the ongoing weakness of domestic demand in Europe's biggest economy. Retail sales fell 1.5% in August from the preceding month, the Federal Statistical Office said.
Source: Investors Business Daily, Wall St. Journal: September 24 – October 1.
U.S. Economic Events & Analysis:
POSITIVE INDICATORS:
GDP better than expected: The U.S. economy contracted at a 0.7% annual pace in the April-June quarter (Q2), the slowest decline since the same quarter last year. It compared with the 1% estimated decline reported last month. Economists surveyed were expecting a revision to show a decline of 1.2%. The economy shrank 6.4% in the first quarter. The government will release its first estimate of third-quarter GDP on Oct. 29. Economists expect Q3 GDP to rise at a 3.6% annual rate.
Housing prices improve (again): The market value of U.S. homes in 20 major cities rose by 1.6% in July compared with June, the third monthly increase in a row, according to the Case-Shiller home price index. In July, prices rose in 18 of 20 cities. Only Seattle and Las Vegas recorded lower prices in July than in June. Prices in all 20 cities were lower in July 2009 than in July 2008.
(More) signs of housing market improvement: The pending-home-sales index rose 6.4% in August to its highest level since March 2007, the National Association of Realtors reported today. The index, which tracks sales contracts signed on existing homes, has risen for seven months in a row for the first time since the gauge was created in 2001, the industry trade group said. The pending-sales index has risen 19% since December.
Layoffs down: Major U.S. corporations announced the fewest number of layoffs during September than at any time since March 2008, in a "sign of further job-market stabilization," according to a monthly tally compiled by outplacement firm Challenger Gray & Christmas. Planned layoffs fell to 66,404 last month, down 13% compared with August and down 50% compared with September 2008.
Job cuts forecast down: U.S. private-sector firms slashed 254,000 jobs in September, says the ADP employment report, for the fewest losses since July 2008. Further, the August figures were revised down to 277,000 jobs lost compared with the 298,000 originally reported, ADP said.
Consumer spending up: U.S. consumer spending soared 1.3% in August, the fastest increase since the post-Sept. 11 shopping binge of eight years ago, the Commerce Department estimated today. Spending on durable goods rose 5.3% in August as auto sales surged on the government's cash-for-clunkers program. In the past year, real consumer spending is up 0.3%, the first year-over-year gain since June 2008.
Benchmark yield down: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.41%, down from 3.48% last week.
Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call. September 24 – October 1.
WEAK INDICATORS:
Jobless claims up: First-time claims for state unemployment benefits rose for the first time in four weeks, the Labor Department reported today. The number of initial claims in the week ending Sept. 26 rose 17,000 to 551,000. It's the highest level since before the Labor Day holiday. The consensus forecast of Wall Street economists was for claims to fall inch up to 531,000. Claims in the previous week were revised to a decrease of 16000 to 534,000 compared with the initial estimate of a decrease of 21,000 to 530,000. The four-week average of initial claims fell 6,250 to 548,000. This is the lowest level since Jan. 24. Meanwhile, the number of Americans receiving state jobless benefits fell 70,000 to 6.09 million in the week ending Sept. 19. This is the lowest level since the week ended April 4. The four-week moving average of continuing claims fell 39,250 to 6.15 million, the lowest level since April 18.
ISM dips: The Institute for Supply Management index inched down to 52.6% in September from 52.9% in August, which was the first time the index has been above the growth threshold in 19 months. The decline was unexpected. Economists expected the index to rise to 54%. Thirteen of 18 industries as tracked by the ISM were growing in September, up from 11 in August.
Consumer confidence down: The consumer confidence index fell to 53.1 in September from 54.5 in August, reversing part of August's nearly seven-point gain, the Conference Board reported, economists surveyed were expecting the index to rise to 57. The Conference Board index bottomed at an all-time low 25.3 in February before rising smartly in April and May. At 53.1, the index remains at low levels seen only a handful of times in the past 42 years.
Durable goods orders down: Durable goods orders declined unexpectedly last month and reversed half of the little-revised 4.8% jump during July. Virtually all of the August decline reflected lower orders for transportation equipment which gave back half of a strong gain during the month earlier. Excluding transportation equipment durable goods orders was unchanged after a 0.9% July increase. Despite the recent monthly volatility, a picture of moderate recovery has emerged from the factory sector. Overall durable goods orders have risen 3.3% since their January low. Moreover, orders excluding transportation equipment since their April low are up 4.4%. These increases have given rise to two months of firm gains in factory sector industrial output of 1.4% and 0.6%.
Chicago-area business down: More companies in the Chicago area reported business worsened in September, according to the Chicago-NAPM. The Chicago purchasing managers index fell to 46.1% in September from 50.0% in August, the trade group said. Economists were expecting an increase to 52%. The new orders index backtracked to 46.3% from 52.5% in August. The employment index was essentially unchanged at 38.8%. Readings under 50% indicate more firms said business was worsening than said it was improving.
Oil up: Crude-oil futures rallied 5.8% Wednesday to above $70 a barrel, erasing monthly losses after government data showed a surprising decrease in gasoline inventories last week as demand increased and gasoline imports slumped.
CRB Index up: The Reuters-Jefferies Commodity Research Bureau is up 13% year-to-date, and up from 9.4% last week, though still off about 30% year-over-year.
Sources: Economy.com, Bloomberg, MarketWatch, IBD week of: September 24 - October 1.
The Market: No doubt the major US stock indexes have gone up a lot in a short time. It’s been easy for pundits to say “too much, too fast”, calling for a “correction”. Indeed, 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 about 59% since March 6th). History, though, tells an interesting story about stock market rallies proceeding steep bear-market drops. According to market research, in 8 of the last 12 bull runs for the S & P 500 since 1949, the index did not decline 10% until after 12 months from the start of the rally. Four of those bull markets did not suffer a 10% or more fall for more than 2 years (the 2003 – 2007 bull market did not fall 10% for almost 5-years). Year-to-date major index performance: S & P 500 17.%, DJIA 10.7%, NASDAQ 34.6%, and the S & P 600 18.1%. Here are the past week’s results: September 24: 390 new highs & 5 new lows, September 25: 290 new highs & 4 new lows, September 28: 223 new highs & 3 new lows, September 29: 334 new highs & 5 new lows, and September 30: 266 new highs & 6 new lows. Industry Group analysis: year-to-date, 180 out of 197 groups we monitor are positive.
Source: Investors Business Daily. September 24 – October 1.
**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:
Market in confirmed uptrend: BULLISH.
Industry group strength broadens : BULLISH. 180 of the 197 industry groups we monitor are up year-to-date. This is about the same as 183 last week, and up from only 9 when the recent rally began.
Dow dividend yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.78%, down from 4.45% March 9, which was a 5-year high.
Volatility index falling: BEARISH. Also known as the ‘Fear index’, the VIX (volatility index) is 25.3, up slightly from last week. It is down from 33.7 3-months ago. Investor risk tolerance increasing. The VIX has dropped from over 50 with the recent market move higher, and has not been this low since last September. 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, said the portion of positive stock advisers rose slightly to 50.6% in the past week, still the highest since December 2007. Bearish sentiment is 23.6, near the low of 20 not seen since October of 2007.
Bear Perspective: 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. September 24 – October 1.
● Earnings & Company Developments: We are still a week away from the "official" start of third-quarter earnings season. The majority of companies will not start reporting until the latter half of October. According to Zack’s research, Q3 earnings for the S & P 500 are expected to be down 23.8% year-over-year. One indicator of overall earnings improvement is analysts continue to raise more estimates than they are cutting. Earnings estimate increases outnumber cuts almost 3:2 for 2009 and upward revisions outnumber cuts by more than 7:4 for 2010. Companies of interest: No company to report.
Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com, September 24 – October 1.
On This Day:
October 1, 1964 -- The Free Speech Movement was launched at the University of California at Berkeley.
Source: history; about.com
Quote: on October
October is one of the peculiarly dangerous months to speculate in stocks. Others are July, January, April, September, November, May, March, June, December, August and February.
Mark Twain
Go Figure:
NOT UP BUT DOWN - Actual worldwide demand for oil in 2008 was 86.2 million barrels a day. Worldwide demand for oil for 2009 is now expected to finish the year at 83.8 million barrels a day. When the year began, global demand had been projected at 88.0 million barrels of oil a day (source: Facts Global Energy).
Valentine Capital Asset Management, Inc.
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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.
