Valentine Capital IPC Notes
by Valentine Capital's Investment Policy Committee

Valentine Capital Asset Management
Investment Policy Committee

WEEKLY MARKET and ECONOMIC OUTLOOK

October 22, 2009 

Streaking

There’s still about a week-and-a-half left in the month, but the markets are currently maintaining yet another month of gains. This month, the Dow Industrials is up 2.4%, the S&P 500 is up 2.3%, the Nasdaq Composite is up 1.3%, while the Russell 2000 is clinging to a 0.1% gain. If these gains continue to hold at the end of next week, the Dow would have its 7th month of gains in the last 8 months. On the other hand, the S&P, Nasdaq, and Russell haven’t had a monthly decline since February and each is on pace to have its 8th straight month of gains.  The last time the S&P was up 8 months in a row was between June 2006 and January 2007. It’s more impressive for the Nasdaq & Russell though. The Nasdaq hasn’t had an 8-month winning streak since the tail end of its 10-month streak in 1995, while the 8-month winning streak will be the Russell’s first since its own 8-month streak 14 years ago. 

GLOBAL THEMATIC OBSERVATIONS  

     ECONOMIC UPDATES

          MARKET ANALYSIS

               EARNINGS DEVELOPMENTS

Japan said it’s benefiting from China.  The country cited China’s demographics as the reason.  Japan said its  largest consumer discretionary companies will be aided the most by the growing population of Chinese consumers. 

China said its economic recovery is accelerating, with nominal gross domestic product growth expected to hit a 9% rate in the third quarter, according to the latest government estimates. China also reported its retail sales rose 15.5% in September from the year before, speeding up slightly from August's 15.4% growth.

UK reported retail sales volumes fell short of expectations in September, coming in flat compared to August, according to government data released today. The Office for National Statistics said seasonally-adjusted sales rose 2.4% from the same month last year. Economists surveyed by Dow Jones Newswires had forecast a strong 0.5% monthly rise and a 2.7% annual increase.

Source: Investors Business Daily, Wall St. Journal:  October 15 – October 22.

 U.S. Economic Events & Analysis: 

POSITIVE INDICATORS:

LEI up:  U.S. leading economic indicators rose 1% in September, the sixth straight increase and a strong signal that a "recovery is developing," the Conference Board reported today. Economists expected the index to rise 0.8%. Eight of the 10 indicators were positive in September, the Conference Board said.  The leading index for August was revised down to a 0.4% gain from 0.6% earlier.  Over the past six months, the index of leading indicator has risen 5.7%, the fastest increase since 1983. Nine of the 10 indicators have risen over the past six months.

Beige Book shows improvement:  The Federal Reserve’s 'Beige Book' report said “…gains in economic activity generally outnumber declines, but virtually every reference to improvement was qualified as either small or scattered," the report concluded.

PPI down:  Lower costs for energy pushed the U.S. producer price index to drop 0.6% in September, the Labor Department reported.  Analysts had predicted a fall of 0.3% for the month. Core producer prices, excluding volatile food and energy inputs, fell 0.1% -- also lower than the 0.1% increase expected. Minus food and energy, those prices have climbed 1.8% -- the smallest year-over-year gain since July 2007. The core rate peaked at 4.7% last October.

Sources: Economy.com, Bloomberg, MarketWatch, IBD, First Call.  October 15  – October  22.

WEAK INDICATORS:

Jobless claims up:   Initial claims for state unemployment benefits rose after two straight weekly declines, Labor Department data showed today. First-time claims for the week ended Oct. 17 were up 11,000 to 531,000. The prior week's claims level was revised higher by 6,000 to stand at 520,000.  More positively, The Labor Department also reported that continuing jobless claims for the week ended Oct. 10 fell to 5.92 million, off 98,000. This is the lowest level since the week ended March 28. The four-week moving average of continuing claims fell 59,250 to 6.03 million -- the lowest level since the week ended April 11.

New home construction flat:  New construction on U.S. housing units was essentially flat in September at a seasonally adjusted annual rate of 590,000, as a big drop in multifamily units was offset by an increase in starts of single-family homes, the Commerce Department reported.  With September's 0.5% estimated increase, housing starts have been flat for four straight months after a big rebound earlier in the year from historic lows. Since the bottom in January, housing starts have risen 21%.  August's starts were revised lower to a 587,000 pace from 598,000 previously reported.  In the past year, starts are down 28.2%.

Home prices decline:  After rising for three months, U.S. home prices fell a seasonally adjusted 0.3% in August compared with July, the Federal Housing Finance Agency reported today.  Prices were down 3.6% in the past year, and were down 10.7% from the peak. Prices are roughly the same level they were in February 2005. 

Holiday shopping forecast down:  After the 2008 holiday season's whopping 15% decline in store traffic, shopper visits for the industry's biggest selling period this year are expected to decline another 4.2%, according to a survey by ShopperTrak, an industry tracker.  However, while traffic was expected to be down, sales may increase 1.6% vs. a 5.9% decline a year ago, the industry's worst in more than four decades, ShopperTrak said.

Oil up:  Crude oil for November delivery gained nearly $3 and 3%, or 1.4%, yesterday to over $81 a barrel yesterday.  It is up from  $75.18 last week.  The Energy Information Administration reported Wednesday that petroleum demand remained weak in the U.S., with demand for gasoline falling to the lowest level in more than five months.

Benchmark yield up: Yesterday’s closing yield on the benchmark 10-year Treasury was 3.40%, same as  last week.  

CRB Index up:  The Reuters-Jefferies Commodity Research Bureau is up 21.4% year-to-date, up from 17.6% last week.  The index is now at a new 12-month high. 

Sources: Economy.com, Bloomberg, MarketWatch, IBD week of:  October 15 - October 22.

The Market:    Thus far, October has not  been the haunted market feared by the street.  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  about 62% since March 6th).   While the major indices came under  some  selling pressure yesterday, the uptrend continues.  Even the month of October (at least not  yet!) has not  derailed  the momentum lifting the  equity markets higher (see our note above).  Year-to-date major index performance:   S & P 500 19.7%, DJIA 13.4%, NASDAQ 36.4%, and the S & P 600 19.1%.     Here are the past week’s results: October 15: 278 new highs & 7 new lows,  October 16: 403 new highs & 11 new lows, October 19: 572 new highs & 14 new lows, October 20:  322 new highs &  15 new lows, and October 21:  455 new highs & 17  new lows.   Industry Group analysis:  year-to-date, 186 out of 197 groups we monitor are positive.  

Source: Investors Business Daily.   October 15 – October 22.

**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.  186 of the 197 industry groups we monitor are up year-to-date.  This is about the same as 179 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 2.70%, 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 21.49, back to where it was on September 3, 2008.  It is down from 24.6 last week.  The VIX has dropped from over 50 near the market bottom in March, 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 to 49.5% in the past week, up from 47.2% last week and still the highest since December 2007.   Bearish sentiment is 23.1%, down from 26.4% last week & 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.  October 15 – October 22.

● Earnings & Company Developments:     Here’s the Q3 earnings summary:  better-than-expected.  According to Zacks Investment Research, the earnings surprise ratio (#beat / #miss) is 5.56. The blended earnings growth rate for the S&P 500 for Q3 2009, combining actual numbers for companies that have reported, and estimates for companies yet to report rose to -20.3%  from -21.5% from last  week.  As of October 1st, the earnings growth rate was at -24.7%. Of the 122 S&P 500 companies who have reported Q3, 76% beat estimates, 10% were in-line, and 14% were below estimates.  The blended earnings growth rate for the S&P 500 for Q3 2009 is currently at -20.3%. (Data provided by Thomson Reuters).  The decline of 23.8% expected for the third quarter is well below the 30%+ declines we have been seeing in recent quarters, and growth should turn extremely positive in the fourth quarter.  Last years earnings killer, financials, is expected to be this year’s king.   The financial sector’s 2009 earnings share are expected to rise to 11.6% from -3.68% in 2008.   The financials are nearly back to having the highest weight in the S & P 500 index .    Companies of interest:   Apple Computer (AAPL) reported it earned $1.67 billion, or $1.82 a share, on revenue of $9.87 billion in sales. Apple's results also topped the estimates of analysts surveyed by Thomson Reuters, who had forecast the company to earn $1.42 a share on revenue of $9.2 billion.

Sources: Zacks Investment Research, Thompson Reuters, Earnings.com, TheStreet.com,   October 15 – October 22.

On This Day:

October 22, 1962 -- President John F. Kennedy announced an air and naval blockade of Cuba, following the discovery of Soviet missile bases on the island.

Source: history; about.com

Notable & Quotable:  on Ambition

“Keep away from people who try to belittle your ambitions. Small people always do that, but the really great make you feel that you, too, can become great.”

 Mark Twain

Go Figure:

HALF AS MANY:    Only 1 out of every 5 retirees (20%) are “very confident” that they have sufficient assets set aside today to maintain their desired retirement lifestyle. Just 2 years ago (2007), 2 out of every 5 retirees (41%) were “very confident” that they had set aside adequate retirement assets (source: Employee Benefit Research Institute).

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.